Preamble

The House met at half-past Two o'clock

PRAYERS

[MADAM SPEAKER in the Chair]

PRIVATE BUSINESS

CITY OF LONDON (WARD ELECTIONS) BILL (By ORDER)

Order for further consideration, as amended, read.

To be further considered on Wednesday 26 July.

Oral Answers to Questions — NORTHERN IRELAND

The Secretary of State was asked—

Peace Process

Mr. David Winnick: If he will make a statement on developments in the peace process. [129859]

Mr. Jeremy Corbyn: If he will make a statement on the peace process in Northern Ireland. [129864]

Mrs. Ann Winterton: If he will make a statement on the current state of the peace process. [129866]

The Secretary of State for Northern Ireland (Mr. Peter Mandelson): Considerable progress has been made in recent weeks. Devolution has been restored, the IRA confidence-building measure is in place, and good progress is being made to implement the Good Friday agreement in full.
I am not complacent: dissident republicans still pose a threat, and decommissioning remains a high priority. Nevertheless, the vision contained in the agreement is now becoming the reality—a better future for Northern Ireland, based on democratic ideals and guided by the principles of non-violence, parity of esteem and consent.

Mr. Winnick: If today's security alert in central London turns out to have been caused by breakaway IRA groups, should not they learn that we did not give in during 25 years of sustained terror and that we are hardly likely to do so now? Does not my right hon. Friend agree that dissident IRA elements and the loyalist factions that have caused so much trouble with hooliganism and violence recently have something in common? They

loathe each other and want to commit murder, but is not what they have in common a desire to destroy the Good Friday agreement?

Mr. Mandelson: I strongly echo my hon. Friend's sentiments, and I deeply regret the inconvenience to rail and underground travellers today. The main paramilitary groups are maintaining their ceasefires. However, a threat remains from dissident paramilitaries opposed to the Good Friday agreement. I utterly condemn that threat, and the disruption caused by the incidents today.
The Government's policy of resolute action against terrorism, combined with the search for a just and enduring settlement has led to a marked reduction in terrorist activity in the past few years. The threat remains, however, and as long as it does the police will continue to combat it with whatever resources they need to do their job effectively.

Mr. Corbyn: In the context of the process of peace and reconciliation, will my right hon. Friend comment on the death of Robert Hamill in Portadown? Is he prepared to authorise or instruct a judicial inquiry, under section 44 of the Police (Northern Ireland) Act 1998, into the circumstances surrounding his murder?

Mr. Mandelson: I do not rule out such an inquiry, or one of a similar kind. However, while investigations into that tragic and brutal killing are continuing, I shall maintain the option without giving any further commitment to undertaking such an inquiry.

Mrs. Winterton: The Secretary of State is a master of the oleaginous reply. Will he break the habit of a lifetime and answer this question directly: what is the estimate of the percentage of IRA weapons that have been inspected by Mr. Ahtisaari and Mr. Ramaphosa? Will he give an indication when decommissioning, the key feature of the Belfast agreement, will be complete?

Mr. Mandelson: A substantial quantity of armaments in a number of dumps was inspected by the two international inspectors. That included weapons, explosives and detonators. I am sure that the hon. Lady will join me in welcoming the fulfilment of that commitment by the Provisional IRA—assuming that further inspections by the two international inspectors can take place in due course.

Mr. David Trimble: The Secretary of State will know that today's incidents in London are being attributed to dissident republicans. Does the right hon. Gentleman recall that dissident republicans were responsible for the Omagh atrocity, and that the House was recalled to enact emergency legislation that we were told would be used against those elements? In the two years since, that legislation has not been used at all. Will it be used? Will the Secretary of State press the Irish Government to use the equivalent legislation on their side of the border?
Over the past two years, the Irish Prime Minister has given assurance after assurance that the law in the Republic will be used against dissident republicans. When will that happen? Has the right hon. Gentleman pressed the Irish Government to fulfil those promises?

Mr. Mandelson: The legislation to which the right hon. Gentleman refers remains on the statute book. Where the police and the prosecuting authorities believe that it is possible and desirable to invoke it, they will do so without hesitation.
The right hon. Gentleman is right that combating dissident republicans depends on close co-operation between the Government and the Irish Government. That co-operation is proceeding, and I can tell the House that I will be holding a telephone conversation with the Irish Minister of Justice at 5 pm, in order to discuss with him what further action both Governments can take.

Mr. Stephen Pound: Following the point raised by the right hon. Member for Upper Bann (Mr. Trimble), I can tell my right hon. Friend that normal life came to a halt in my part of west London this morning because of what we are now told was a "viable" explosive device in Ealing. A coded warning was given from what we assume to be a dissident republican group. Will my right hon. Friend join me in paying public tribute to the emergency services, and to the operators of the overground trains and of the London underground, who kept disruption and misery to a minimum?
Will my right hon. Friend also accept assurances from me, my constituents and all decent people in the kingdom that his work becomes ever more vital? We are talking not about some faraway country, but about life and death for us, on our own doorsteps.

Mr. Mandelson: I am sure that the whole House will want to join my hon. Friend in expressing gratitude to the emergency services, who reacted so promptly and efficiently today in response to the coded warnings that were received, and in coping with the disruption that ensued. The device that has been exploded at Ealing was an improvised explosive device. Further details are awaited, but the code word used in connection with the incident was the same as that used for the attack on the railway line at Newry and in other incidents and hoaxes on the mainland. The device at Ealing may have been of a size similar to that of the Hammersmith bomb. It certainly appears that this attack was carried out by dissidents, but we shall pursue the matter and pin down exactly who was responsible.

Mr. Lembit Öpik: I want to return to matters in the Province. Will the Secretary of State say what we must do to prevent a recurrence, in the run-up to 12 July 2001, of the recent civil unrest, which involved illegal roadblocks?

Mr. Mandelson: It is slightly pessimistic to assume already that there will be continued deadlock at Drumcree next year. The determination by the Parades Commission has set out a clear, thoughtful and considered route map to enable all sides in the dispute to reach a local agreement. That will ensure that what took place in the past couple of weeks will not happen again next year.
The Parades Commission's proposals deserve careful consideration. I urge Portadown Orangemen to engage in the process. If that happens, I hope that local residents will make a reciprocal gesture and commitment.

Mr. Eddie McGrady: I am sure that the Secretary of State is aware that, as we in Northern Ireland move painfully and slowly towards peace and normality, there has been an enormous increase in drugs trafficking, which has penetrated our communities and led to beatings, petrol bombings and shootings. Will he urgently examine that new cancer in our society, which is often promoted by erstwhile or so-called erstwhile paramilitaries, review the resources that he and the police have at their disposal, enhance those resources, and start an all-out war on those parasites on our society, who are destroying our young people?

Mr. Mandelson: It is true that the spread of drugs, their supply, their use and their sale, behind which stand many members of paramilitary organisations, is now at the heart of the programme of activities undertaken by the RUC. Wherever I go in Northern Ireland, the story is the same: the cancer is spreading into every community. I assure the House that the RUC will utilise every resource it has at its disposal to combat that illegal and unacceptable activity, and that the RUC will have the Government's full support in doing so.

Mr. Andrew MacKay: Will the Secretary of State confirm that on or before 28 July, he will release all the remaining terrorist prisoners who committed crimes before the signing of the Belfast agreement? Will he confirm that one of the most notorious terrorists, Michael Stone, will be released this Friday? Will he also confirm that there has, as yet, been no decommissioning of illegally held arms and explosives—not one gun, nor one ounce of Semtex?

Mr. Mandelson: The right hon. Gentleman is right about the forthcoming prisoner releases, but I should emphasise that they depend on the maintenance by the organisations to which the prisoners belong of the ceasefires to which they are committed. Evidence of the involvement or engagement of any paramilitary group now on ceasefire in violent or terrorist activity would, of course, have a direct impact on my assessment of their ceasefire and potentially on further prisoner releases. I should point out that all the prisoners due to be released will be released on licence, which provides a mechanism to return them to prison, if necessary—an important point that both the House and the prisoners should bear in mind.

Mr. MacKay: The Secretary of State will recall that the Prime Minister, rightly, referred to a parallel process when he was persuading the people of Northern Ireland to vote yes in the referendum. However, the process is not parallel when terrorist prisoners are given early release but no decommissioning takes place. At this late hour, I plead with the right hon. Gentleman, on behalf of the great majority of people in Northern Ireland and on the mainland, not to release the remaining terrorist prisoners until, at the very least, all the paramilitary groups that signed up to the Belfast agreement have opened their arms dumps to international inspection and decommissioning starts to proceed.

Mr. Mandelson: I shall not introduce that fresh condition at this stage, as I do not think that it would be a constructive step in the peace process. However, I remind the right hon. -Gentleman that the Provisional IRA has undertaken its confidence-building measure, which is the first step in a process that the IRA itself says will end in the complete and verifiable putting beyond use of its weapons; in addition, contact has been resumed between the IRA and the decommissioning body. Those are welcome and important confidence-building moves. I should like to see other measures undertaken on the same basis by loyalist paramilitary organisations, and I take this opportunity to urge them to do so.

Mr. Kevin McNamara: My right hon. Friend will recall that among the confidence-building measures was the Patten report and the new Police (Northern Ireland) Bill. In his speech at Coleraine yesterday, he said that he had introduced 66 changes into the Bill at the behest of the nationalists. At best, those changes only partially restore the Patten provisions, and in only one or two instances do they fulfil the provisions of Patten. Will he give an undertaking that, when the Lords consider the Bill, Patten will be restored to the Bill in full, and that there will be no more withdrawing or alteration of Government amendments at the behest of the Unionists?

Mr. Mandelson: I strongly contend that the original Bill reflected entirely and faithfully the Patten commission recommendations. In addition, the improvements and changes that have since been made to the Bill have strengthened it. I did not make a speech in Coleraine yesterday— [Interruption.] I did not leak a memo either; however, I did make the point that we need to make a distinction between those parts of the Bill that can and have been, quite legitimately, improved and those claims made by a minority who deliberately misrepresent the Bill's contents. I shall continue to refute those false claims about the Bill, just as I shall continue to consider constructively amendments proposed to improve the Bill's contents.

Weapons

Mr. William Ross: How many weapons believed to be held by terrorist organisations have been recovered by the RUC and the Army in Northern Ireland this year. [129860]

The Secretary of State for Northern Ireland (Mr. Peter Mandelson): During the period 1 January to 30 June this year, the RUC and the Army recovered 64 firearms, 6,085 rounds of ammunition, 247.1 kg of explosives, 34 detonators and four launchers. It is not possible to attribute those finds to individual terrorist groupings.

Mr. Ross: Does the right hon. Gentleman appreciate that we on these Benches— [Interruption.]

Madam Speaker: Order. I cannot hear Mr. Ross and I have the impression that the Secretary of State cannot either, because conversations in the Chamber are very noisy.

Mr. Ross: Does the Secretary of State appreciate that we on these Benches agree entirely with the remarks by the right hon. Member for Bracknell (Mr. MacKay)?

Does he also appreciate that not a single round of ammunition or weapon that he has just detailed was given up voluntarily, but that they all had to be recovered from the terrorists, who were unwilling to give them up? Has the Secretary of State yet been able to determine whether the recent murders of Mr. Cairns and Mr. McCoy and the bomb set off in Stewartstown were carried out by dissident or mainstream terrorist organisations? If mainstream, would that not constitute a breaking of the ceasefire, or does that apply only to murders of members of the security forces?

Mr. Mandelson: If that is the case, the hon. Gentleman is right. Let me take the opportunity to make it absolutely clear that if I receive any assessment based on evidence collected by the RUC that any individual has been involved in perpetrating such offences, I shall expect swift action to be taken against that individual. If that has implications, through that individual's membership of a paramilitary organisation, for the maintenance of that organisation's ceasefire, I shall take them into account when considering further prisoner releases.

Mr. John McFall: My right hon. Friend will be aware of yesterday's hugely successful reception held in the Palace by the RUC, which was attended by Sir Ronnie Flanagan himself. In the light of the passage of the Police (Northern Ireland) Bill, will he ensure that Catholic recruits are taken into the RUC and that we have representation at all senior levels in future? Will he state what discussions he is holding and what measures he is implementing to ensure that that becomes a reality?

Mr. Mandelson: The whole House will join my hon. Friend in applauding the performance of the RUC in the past couple of weeks. More generally, I believe that the police response to events surrounding Drumcree was measured and proportionate, but no less firm for all that, and that they acted entirely professionally. If we were not serious about creating a fresh start for policing, we would not be introducing a 50:50 selection procedure to achieve an intake to the new police service that is balanced between Protestants and Catholics. We shall operate that system not only for three years or 10 years, but for however long it takes to achieve the properly representative police service that Northern Ireland needs if its police service is to be even more effective in future.

Mr. Robert McCartney: With reference to the important issue raised by the hon. Member for South Down (Mr. McGrady) on the extension of mafia-like activities in drugs, extortion and other criminal acts, the Secretary of State has confirmed the widespread involvement of paramilitaries on both sides. Can he confirm that the paramilitaries involved are largely the good terrorists who support the peace process, not the wicked, dissident terrorists who are allegedly disrupting London?

Mr. Mandelson: Unlike the hon. and learned Gentleman, I do not distinguish between good terrorists and bad terrorists. To me, all terrorists are bad and equally unacceptable. If there is any evidence that will bring them, individually or collectively, to book, it will be acted on decisively.

Mr. John M. Taylor: In that spirit, while it is true that the IRA has opened some arms dumps to the


international inspectors, is it not regrettable that other paramilitaries have made no such progress? What pressure is the Secretary of State exerting on that point?

Mr. Mandelson: It is highly regrettable that the loyalist paramilitaries, who, in a sense, got off to a good start—better than that of the Provisional IRA—have now fallen behind on the efforts required to bring about a complete decommissioning of all weapons held by all paramilitary organisations in Northern Ireland. Their own side of the community—the people for whom they purport to speak and represent—stand to gain just as much as anyone else from a peaceful, demilitarised society in which violence and terrorism have been put behind then once and for all. I hope that those organisations will begin to make their contribution to the complete decommissioning that the people of Northern Ireland expect and demand.

Crime Statistics

Mrs. Eleanor Laing: If he will make a statement on the current levels of recorded crime in Northern Ireland. [129862]

The Secretary of State for Northern Ireland (Mr. Peter Mandelson): I apologise for the absence of my junior Minister, who is caught on a train somewhere in south London.
The number of recorded crimes for the period April 1999 to March 2000 has increased by 9.2 per cent. against the same period in 1998–99. More than 60 per cent. of the overall rise was accounted for by increases in two crime classes—offences against the person, which went up 16.2 per cent., and criminal damage offences, which rose 12.8 per cent. The number of offences cleared by the police in 1999–2000 was 13.8 per cent. higher than in 1998–99. There was also a rise in the overall clearance rate from 29 per cent. to 30.2 per cent.

Mrs. Laing: While those figures are in some ways worrying, they are also relatively good in comparison with those for some other parts of the United Kingdom. That is a great credit to the RUC, and the Secretary of State was right to praise the force a few moments ago. Does he agree, however, that a worrying fact is concealed behind the statistics in that a great many punishment beatings and mutilations are not recorded crimes because their victims are too afraid to report them?

Mr. Mandelson: The hon. Lady makes a good point. While comparisons are not straightforward, it is clear that the overall crime rate in Northern Ireland is lower than that in other parts of the UK with comparable population sizes. Paramilitary attacks are entirely the opposite of what the Good Friday agreement was all about. I call on all those who have information to co-operate with the police in order to stop those attacks in future. I call on those with influence over paramilitary groups to call a complete and immediate cessation to those barbaric acts.

Dr. Nick Palmer: As a member of the Select Committee on Northern Ireland Affairs, I visited Drumcree and spoke with the police who held the line. Will my right hon. Friend join me in congratulating the police on keeping the situation within acceptable boundaries this year and on their record in combating

disorder and crime in Northern Ireland? Does he agree that once the Police (Northern Ireland) Bill has been enacted, the time will have come to stop looking backwards and quibbling over every detail so that we can work together to ensure that the police have a chance to beat terrorism and crime in Northern Ireland?

Mr. Mandelson: The whole House will agree with my hon. Friend's sentiments. Everyone should look to the future and towards creating the fresh start in policing for which a consensus exists. The events in Drumcree showed that bullies do not get their way in Northern Ireland and that physical force confrontation—by loyalism or republicanism—does not succeed any more in mobilising the mass of people in Northern Ireland. That is a tribute to the peace process and to the strength and durability of the Good Friday agreement.

Rev. Martin Smyth: I join those who have congratulated the RUC on its work. Is the Secretary of State aware that the force is under tremendous pressure, not only in dealing with terrorist activity but because of the shortage of funds that leaves many stations not properly manned? Is failure to report republican parades a recorded crime? That is happening, and people are concerned that the law is not being applied impartially.

Mr. Mandelson: The RUC is fairly and even-handedly applying the law to all groups in both traditions in Northern Ireland. It has the resources and manning to do so, and, under the present Government, I can assure the hon. Gentleman that it will continue to have all the resources, skills and training that it needs to do its job effectively in Northern Ireland in whatever circumstance and in the face of whatever challenge to law and order from whatever source it comes.

Madam Speaker: Order. Time is up, and I appeal to the House to settle down. There is a lot of noise and loud conversation. Ministers are finding it difficult to make themselves heard.

Oral Answers to Questions — PRIME MINISTER

The Prime Minister was asked—

Engagements

Mr. Simon Hughes: If he will list his official engagements for Wednesday 19 July.

The Prime Minister (Mr. Tony Blair): This morning, I had meetings with ministerial colleagues and others. In addition to my duties in the House, I shall be having further meetings later today.

Mr. Hughes: Is it not now completely true that the Labour Government are out of touch with gut British instincts? They were elected on a promise to make sure that pensioners
share fairly in the increasing prosperity of the nation


but they have announced a public expenditure package of £43 billion in which pensioners do not receive a single penny.

The Prime Minister: Let me remind the hon. Gentleman that the Liberal Democrats' commitment was to raise pensions in line with prices, not earnings. Secondly, they asked us to help the poorest pensioners first, and the minimum income guarantee has raised the pension for the poorest—

Mr. Hughes: indicated assent.

The Prime Minister: The hon. Gentleman says that that is right, but he has just been telling me it was all wrong. We have raised the pension for the poorest people by between £15 and £20 a week, and £6.5 billion has been spent in total. The extra money that we are putting into schools and hospitals is vastly in excess of anything that the Liberal Democrats ever asked for.

Mr. Ian Cawsey: Last Friday's announcement that Corus would make 600 steelworkers redundant at its Scunthorpe works will bring the number of workers there below 4,000. In 1979, there were more than 20,000 steelworkers there. Will my right hon. Friend assure us that his Government will give every aid and assistance to the local taskforce that has been formed to ensure that there are new jobs and opportunities for the area? Is he aware that last night my local newspaper, the Scunthorpe Evening Telegraph—[Interruption.] Wait for it. Last night, the paper stated that the biggest hypocrite on job losses was the Leader of the Opposition, for trying to make political capital out of job losses in an industry largely destroyed by the Tories.

The Prime Minister: We will of course work closely with my hon. Friend's constituents to do all we can to protect them following that announcement. We will work hard to see that there are additional jobs, but people should know not only that the Conservative party decimated the industry but that it is now pledged to public spending cuts of £16 billion, which would devastate my hon. Friend's constituency and those of hon. Members throughout the House.

Mr. William Hague: Two years ago, the Government announced spending of £21 billion, which they said would transform the national health service. Since then, the waiting list for the waiting list has grown by 150,000 and we have learned that there were fewer heart bypass operations last year than for 25 years. Is it not a disgrace that the Prime Minister is commissioning memos ludicrously entitled "Getting the Right Place In History"—even Napoleon did not commission a memo on that subject—when many people are struggling to get the right place in hospital, thanks to the incompetence of his Administration? Was not the adviser who wrote
TB has not delivered. He said he would improve the NHS…but instead things have got worse
absolutely spot on?

The Prime Minister: I thought that the right hon. Gentleman might want to talk about the memo rather than yesterday's spending review. Let me tell him what the

first comprehensive spending review delivered for the health service—38 new hospital developments are under way, more than 6,000 more qualified nurses, 5,000 more doctors and every accident and emergency department modernised. Now let him tell us what £16 billion of spending cuts would deliver.

Mr. Hague: Does the Prime Minister not understand that he has talked about tens of billions of pounds for years, but things have got worse? As the same adviser told him:
We have not proved strong enough…to get enough done.
[Interruption.] There is no point in people not wanting to listen to that advice, as the Prime Minister paid out thousands of pounds of the Labour party's money to get it. Some of us read it for 30p in The Sun.
We shall set out our own plans on public spending, which will include— [Interruption.] They do not want to hear.

Madam Speaker: Order. There are a lot of noisy people.

Mr. Hague: We shall set out our own plans on public spending—to spend what the nation can afford. They will include the reform of the welfare state, from which the Prime Minister ran away so pitifully. If he thinks that he is going to spend £16 billion more than a Conservative Government would, he had better work out which £16 billion of additional tax rises he will levy on the people of this country.
The Prime Minister said that he would be tough on crime, and promised 5,000 additional police officers. Police numbers have now fallen, thousands of criminals have been released early, and violent crime is up 16 per cent. Was it not the Prime Minister's trusted adviser who said— [Interruption.] We can read more of it. Was not the trusted adviser who said that "TB" and his Government were "soft on crime" absolutely spot on?

The Prime Minister: The right hon. Gentleman said that he would publish his plan for spending cuts, but I can tell him that the Conservative research department has already published it this morning. The document says that the revenue gap will be £16 billion, and helpfully sets out where the cuts will fall, region by region. For the north-west, there will be cuts of £1.7 billion; for Yorkshire and Humberside, £1.2 billion; for the midlands, £2 billion; for London, £1.8 billion. We know where the right hon. Gentleman's spending cuts will fall, and every Conservative Member of Parliament will have to answer for that.
The right hon. Gentleman said that surely the Government's spending plans would mean that taxes would have to go up. Conservative Members are all nodding, so I shall read out what the shadow Chancellor said the day after the Budget:
the Red Book which is the document that accompanies the Budget…shows that the Government expects the tax burden to fall during the next parliament, which is exactly what we expect.


Because we have run the economy well, and have got debt and unemployment down, we can afford that spending. Let us have some more details of that £16 billion of cuts.

Mr. Hague: The Prime Minister is the man who said that he had no plans to increase tax at all. Since he said that, people have paid more tax on their petrol, pensions, marriages and mortgages. When the Prime Minister came into office, the poorest fifth of households paid 37 per cent. of their income in tax. Will he give the latest figure from the Office for National Statistics for the poorest fifth of households?

The Prime Minister: I can tell the right hon. Gentleman about the tax burden, as it is set out very clearly. The tax burden is actually falling this year, and is due to fall next year. However, it is correct to say that for the first two years, we took the measures necessary to get rid of the deficit. As a result, we have the lowest inflation in Europe, and interest rates at 6 per cent, not 10 per cent. as they were under the right hon. Gentleman's Government.
As for petrol, it is no use the right hon. Gentleman going round promising that he will cut people's petrol duty. Let me quote his shadow Chancellor again, from Frost on Sunday:
Frost: Would you reduce the tax on petrol definitely, would you give a guarantee on that?
Portillo: Well…I…I'm not getting into the business of guarantees.

Hon. Members: More, more.

Mr. Hague: There is a lot more. They are welcome to a lot more. I was asking the Prime Minister about the poorest fifth of households in this country and how much they pay in tax. The answer is that their tax has gone up from 37 per cent. of their income to 40 per cent., because under this Prime Minister, tax rises are for the many and not the few. He is the Prime Minister who said that there would be no tax increases at all. Does he accept the truth when the adviser who wrote to him—who has written to him a lot in recent weeks—tells him that he has been
undermined by a combination of spin, lack of conviction and…lack of integrity?
When it comes to tax, is that not absolutely spot on?

The Prime Minister: I wonder what the right hon. Gentleman's adviser is saying to him about his tax guarantee. To return to what he was saying about spending and tax—as a result of the commitments that we have given, the tax burden is falling, as I have said. I accept that we have made a choice to put investment into schools, transport, the police and the health service because we believe that that is the right priority for the country. The dividing line at the election is now clear: it is between a party willing to invest in our public services, and £16 billion of cuts under the right hon. Gentleman.

Mr. Hague: Madam Speaker, The level of public spending is no longer the best measure of the effectiveness of government

Those are the words of the Labour party manifesto, and this Government have now produced higher crime, larger class sizes and longer waiting lists in the national health service. Is not the truth that they have no plans to deliver, only new initiatives to spin?
Can anyone think of anything more pathetic than a Prime Minister so short of ideas after three failed years in office that he sends a memo round Whitehall asking for "eye-catching initiatives"? He begs for "something tough" that
I, personally, should be associated with.
People who got their place in history did not send round memos asking for eye-catching initiatives. Winston Churchill did not ask for blood, sweat and eye-catching initiatives. Was not the person who wrote
all these things add up to a sense that the Government…are…out of touch with…British instincts
absolutely spot on?

The Prime Minister: Apart from the points that the right hon. Gentleman made on the health service, education and crime, he says that he wants waiting lists to go down even further. Well of course, but that requires investment. He said that he wanted police numbers to start rising again. I agree, and that is exactly what we will bring about, but it needs investment. He said that there should he a reduction not only in class sizes for five, six and seven-year-olds, which we have reduced, but in other class sizes. We agree, but that requires investment. The right hon. Gentleman does not seem to realise that we are putting in the investment, and he has pledged to cut it.
The right hon. Gentleman talks about how he will run a more prudent economic policy, but I point out to him—this is another item of policy, so he will not be aware of it—that his shadow Chancellor has not merely given a commitment to £16 billion of cuts; he has made spending commitments. Here they are: £1 billion on private medical insurance—[HON. MEMBERS: "Ah!"]—the reintroduction of the assisted places scheme—[HON. MEMBERS: "Ah!"]—more money for the Territorial Army—[HON. MEMBERS: "Ah!]—detaining all asylum seekers; giving them back their benefits; more money for farmers; more money for tobacco tax; more money on prisons; and Finance Bill amendments that total—[HON. MEMBERS: "They are all saying yes."]—Well, it is such a large sum of money. Their amendments to the Finance Bill total £4.5 billion. Not only can the Leader of the Opposition not tell us where his spending cuts will fall, he cannot even finance the spending commitments he has made.

Mr. Hague: No one any longer believes the Prime Minister's fiction about the Government's figures, let alone his fiction about the Opposition's figures. He need not be concerned about whether he is personally associated with eye-catching initiatives. As crime rises, he is personally associated with it. As the national health service deteriorates, he is personally associated with it. As taxes have risen, he is personally associated with that. As the Government drift, he is personally associated with that. Does he not realise that he does not need to write memos about getting his place in history, because we, and the British people, will make him part of our history far sooner than he ever expected?

The Prime Minister: The right hon. Gentleman said that we were making up the figures about his spending


cuts pledge. He said that those figures were made up, but they are not. The Conservative research department has shown spending cuts of £16 billion.
The right hon. Gentleman is right. Of course I am personally associated with all the spending in the review: the extra money on schools, the extra money on hospitals, the extra money on transport, the extra money on defence, the extra money on all those services we need to provide a stable, prosperous future for our country. What is the right hon. Gentleman personally associated with? [HoN. MEMBERS: "Cuts."] The Leader of the Opposition is personally associated with what his shadow Chancellor has done—it is the nearest to political hara-kiri that I have ever seen in an Opposition leader. His shadow Chancellor has committed the right hon. Gentleman and his party to £16 billion of cuts. From now until election day they will pay the price, and then they will pay it finally.

Mr. John Home Robertson: Following the Chancellor's announcement yesterday, and in view of the fact that unemployment in Scottish constituencies such as mine has been almost halved since the general election—in accordance with our promises—does my right hon. Friend agree that the hon. Member for Banff and Buchan (Mr. Salmond) was wise to decide to throw in the towel as the leader of the Scottish National party?

The Prime Minister: I do not think that I should comment on the decision of the hon. Member for Banff and Buchan to stand down. My hon. Friend will be aware, however, that the Conservative party wants cuts of £1.4 billion for Scotland. I am sure that will be of enormous assistance to my hon. Friend and his colleagues when they fight the next election.

Mr. Charles Kennedy: Will the Prime Minister confirm that yesterday's statement by the Chancellor finally brings to an end 21 years of Conservative spending? As the Labour Government stuck to the Tory spending limits during the first three years of this Parliament, will he give us the official figures for the number of operations cancelled, the number of police positions lost, and the number of pensioners who dipped into comparative poverty, during that period?

The Prime Minister: It is correct that we had two tough years on public spending. Let me explain why. We faced a situation in which national debt had doubled; there was a borrowing requirement of £28 billion, and we were paying out more in interest payments on the debt than we were spending on the school system. The right hon. Gentleman will remember that 18 months ago, many people were predicting recession.
It was important for us to stabilise the economy first. We have done that; we have cleared the deficit and got public finances under control. Secondly, we had to make sure that we got people off benefit and into work—there are almost a million fewer benefit claimants now. Thirdly, we have to make that investment. We made it only when we had got the public finances sorted out, because, in all honesty to people, that is the only way that is sustainable.

Mr. Kennedy: Would it not be fair of the Prime Minister—these are the official House figures—to confirm that the price paid over that period has been

179,000 operations cancelled, 1,700 fewer police officers and 400,000 pensioners who have dipped into poverty? When he puts those figures in that context, will the Prime Minister tell the House and the people who voted for him last time that this has been, to coin a phrase, a price well worth paying?

The Prime Minister: No. May I correct the right hon. Gentleman on the subject of pensioners, which I think that he or one of his colleagues raised last week? Those figures refer to the period before the minimum income guarantee, which will make a big difference to pensioner poverty, came into effect. Even in the straitened economic circumstances of the first two years, we put more money into schools and hospitals than the Liberal Democrats promised in their election manifesto.
We had to decide what the key priorities of the country were. It was no use spending money unless we had sorted out the public finances and the economy on a sustainable basis. As a result we have a healthy economy, we have strong public finances and we have large numbers of people off benefit and into work—something that the new deal has helped enormously, incidentally, and the Liberal Democrats opposed the windfall levy that paid for it.
Now what is important is to make the investment in education, skills, technology, science and transport that will increase the productive capacity of the economy, and then increase investment in law and order and health care, which increase people's security. Those are the right priorities for the country.

Ms Bridget Prentice: Which does my right hon. Friend think will be of more interest to my constituents—a two-month-old leaked memo, or the £60,000 for each of the secondary schools in my constituency?

The Prime Minister: Of course we know why the Conservatives want to talk about that. However, what we should talk about is the clear strategic decisions that have been taken by both political parties over the past two weeks—for us, to put investment in our future first; for the Conservatives, to put boom and bust, and spending cuts guaranteed, before our essential services.

Sir Archie Hamilton: The television documentary on Saturday night showed that Alastair Campbell is at the heart of the spin machine for the Labour party. Can it be right that he goes on getting a £96,000 salary, paid for by the taxpayer? When I last asked the Prime Minister about Mr. Alastair Campbell's salary, he answered a totally different question about spin doctors. Will he this time answer the question that he has been asked, not one that he has not been asked?

The Prime Minister: I am entirely satisfied with the job that my chief press spokesman is doing—[Interruption.] Once again, the Conservatives are delighted to ask about anything other than the comprehensive spending review. Let me remind the right hon. Gentleman of what he said before the election, in April 1997. He said that by


embracing the minimum wage and the social chapter, the Labour party would increase unemployment and cut child benefit. [Interruption.]

Madam Speaker: Order. Mr. Townend, you are bursting a blood vessel.

The Prime Minister: We will see how many of the Conservative questions are about the spending review. What the right hon. Gentleman will have to explain at the next election is where he will find £24 million of spending cuts.

Mr. Jim Cunningham: Does my right hon. Friend agree that now that the new deal has been made permanent, it will benefit the unemployed and, more importantly, it will benefit young people? Will he congratulate the 434 young people in my constituency who have benefited from the new deal? Does he also agree that if Conservative Members ever got back into power, they would wreck the new deal?

The Prime Minister: Of course Conservative Members are committed to scrapping the new deal. The new deal has been of fundamental importance, not just in getting people off benefit and into work, but because it has resulted in some of the £3.5 billion savings on benefits. My hon. Friend is absolutely right—the Conservative party would scrap the new deal, and many of the cuts that it would then impose on the schools, transport and health budgets as a result of its spending cuts guarantee would also have a deeply adverse effect on my hon. Friend's constituents.

Mr. Laurence Robertson: I shall ask a question about the comprehensive spending review. Will the Prime Minister tell my constituents not how much extra money will go into health and education, but how it will address the postcode lottery and bring about a fairer funding formula for education—both areas in which my constituents in Tewkesbury are disadvantaged?

The Prime Minister: I am delighted to tell the hon. Gentleman that as a result of the extra money going into the health service, and in accordance with the advice tendered to us by the National Institute for Clinical Excellence, we are able to fund drugs better in the health service. It is our desire to use that money to get rid of the postcode lottery.
I shall of course tell the hon. Gentleman exactly what the rest of the spending will do in his constituency: it will help to get more doctors and nurses, and it will help to do other things, such as rebuild the accident and emergency departments if they need refurbishing. It will help to bring new information technology into the national health service. It will also help to get waiting lists and waiting times down, but I am afraid that at the next general election, he will have to explain to his constituents why there should be £24 million of cuts. I understand that he wants more money for his constituency, but the tragedy for him is that we shall provide it, whereas his party would cut it.

Mr. Andrew Dismore: In Barnet the police are very overstretched because of the sheer size of the geographical area that they have to cover—33 square miles, with 20 shopping centres. That

is not unusual for outer London. Will my right hon. Friend confirm that as the result of the very welcome announcement yesterday, the resources will be devoted to the police service in outer London to enable it to tackle the real problems of violent crime and vandalism, which cause such fear in our communities?

The Prime Minister: As a result of the announcement that was made yesterday, of course there will be more money for front-line policing, and my right hon. Friend the Home Secretary will make an announcement about that shortly. That is very important. I understand that there are two prospective Conservative candidates in my hon. Friend's constituency, because one was too extreme to be allowed to stand by Conservative central office, so my hon. Friend will be in the happy position of being able to ask one or both of them where they will find the £24 million of cuts.

Miss Anne McIntosh: Is the Prime Minister aware that in Vale of York the price of unleaded petrol has reached 96.9 pence a litre, which is more than £4 a gallon? Is he proud of the fact that he has increased petrol prices by 3.3 per cent. in line with inflation, but pensions by only 1.1 per cent.? Does he want pensioners to receive the message that petrol prices will go up, and they will have less money to pay for it?

The Prime Minister: In answer to the Leader of the Opposition, I have said that in fact, the system that we use to calculate pensioners' increases is precisely the one that has been used for many years. In respect of petrol prices, as I have said at the Dispatch Box in the last year, the bulk of the increase has been due to the rise in the oil price—but I accept that in the first two years, we took the necessary action through the fuel duty escalator, which was introduced by the previous Government, to cut the deficit. A moment ago I read out what the shadow Chancellor said. The hon. Lady can sympathise with her constituents, but the fact is that she is not pledged to cut a single penny of the duty on petrol. It is important to recognise that there are choices, and we believe that it is sensible to have a stable economy and to invest in public services.

Mr. Russell Brown: In April I raised the issue of the long-term care of the elderly with my right hon. Friend. According to the Chancellor, we are likely to hear good news next week about additional finances for that. Can my right hon. Friend assure me that those additional finances will be sustained over a good number of years, thereby alleviating the hardship that many elderly people feel when receiving care in their own homes, or in residential or nursing care?

The Prime Minister: We will, of course, ensure that that is sustainable, if we have the authority to do so as the elected Government over the next few years. I do not want to prejudge the announcement that will be made next week, but it is important that we ensure that the issues of long-term care that were raised by the royal commission, which we set up, are properly dealt with. Again, we know that the Conservative party would cut the very money that we shall put into that.

Mr. John Hayes: Will the Prime Minister give a straightforward, concise


and reasonably cogent answer—[Laughter.] Yes, I know that that last requirement will not be easy—to the question posed by my right hon. Friend the Member for Epsom and Ewell (Sir A. Hamilton)? Let me repeat that question, because clearly he did not hear it the first time: as Mr. Alastair Campbell will clearly play a central part in Labour's election strategy—[Interruption.]

Madam Speaker: Order. Government Members should listen to the question. [Interruption.] Order. Listen to the question, and listen to the answer.

Mr. Hayes: As a recent television documentary revealed that Mr. Alastair Campbell is to play a central

role in the Labour party's election strategy, should he receive a salary of almost £100,000 funded by the taxpayer?

The Prime Minister: As I have just said to the right hon. Member for Epsom and Ewell (Sir A. Hamilton), I am entirely satisfied with the work that Alastair Campbell is doing and with the fact that it is entirely proper, and entirely within the rules that are set out, that he does that work. Again, although the hon. Gentleman may think that the big issue in his constituency at the next election will be Alastair Campbell, I can tell him that it will be £24 million of cuts.

SPEAKER'S STATEMENT

Madam Speaker: I have to tell the House that yesterday, together with other right hon. Members, I attended upon Her Majesty Queen Elizabeth the Queen Mother to deliver the House's message of congratulation on her 100th birthday. Her Majesty made the following reply:
I was deeply touched by your message of congratulation and by the sentiments you expressed on the occasion of my 100th birthday.
I feel fortunate that during the last century I have been given the opportunity to serve our country in times of war and peace, and I have always been helped and uplifted by the love of my family, by the fortitude and courage of our people, and by my faith in almighty God.
I pray that future generations will live in peace and prosperity, and I send to you all my heartfelt thanks for your kind message on my birthday.

Police and Criminal Justice Spending Review

The Secretary of State for the Home Department (Mr. Jack Straw): With permission, Madam Speaker, I should like to make a statement about increased spending for the police and the criminal justice system for 2001–04, following the statement by my right hon. Friend the Chancellor of the Exchequer yesterday.
The Government's strategy for fighting crime is comprehensive and long term. The current programme for that was spelt out in a document laid before the House last November. Our strategy seeks to prevent criminal behaviour, as well as to raise the performance of the criminal justice system, better to detect, to catch and to punish those responsible for crime and disorder. The spending review will reinforce that strategy.
First, the police. The police are at the sharp end of the fight against crime and disorder, but, like others in public service, they have operated under tight financial constraints in the first years of this Government. For the first two years in office, we kept to the spending plans set for the police by the previous Administration. Following the comprehensive spending review published two years ago, I announced in December 1998 a small real-terms increase for 1999–2002 of about 2 per cent. in total. None the less, pressures on police budgets have continued, not least from the cost of pensions, which is now estimated to take 14.5 per cent. of total budgets compared with just half that—7.2 per cent.—10 years ago.
Despite those pressures, I am glad to tell the House that the police service has embraced reform over the past three years, with a commitment to a clear performance culture. Major strides have been made in cutting unnecessary bureaucracy to meet 2 per cent. efficiency targets; in reducing unacceptably high sickness and early retirement rates; in setting challenging performance targets; and in publishing detailed information about crime trends at basic command unit and crime and disorder partnership level so that the service and the public can better compare police performance in their areas.
As we know from the experience of the 1980s, without reforms of that kind, increased police funding is no guarantee of improved performance. However, increased resources properly targeted and managed can unquestionably help to secure significant improvements in the fight against crime. I am therefore pleased to announce today major investment in policing in England and Wales.
for the police, spending in cash terms will rise by more than 20 per cent. between this year and 2003–04. The settlement will see an increase of over 10 per cent. in cash for next year alone against the current provision for 2000–01, which itself has been raised by £90 million over the original 1998 comprehensive spending review plan. The allocation will therefore rise from £7.7 billion for this year to £8.5 billion next year; £9 billion in 2002–03; and £9.3 billion in the final year of the settlement.
Much of that increase will be allocated direct to police forces through the police grant and SSA for them to spend as best fits their local needs. I am, however, targeting investment on two key areas to boost front-line policing, by raising police numbers and by enhancing police equipment and new technology.
As the House knows, the downward trend in police officer numbers, which began in 1992–93, has regrettably continued under the present Administration. I have today answered a parliamentary question from the hon. Member for Southwark, North and Bermondsey (Mr. Hughes) showing that officer numbers in the last year have fallen by 1,678, to a total of 124,418 for the 43 forces in England and Wales. Civilian numbers in the last year have shown a small rise to 53,227.
To reverse that trend of falling police numbers from 1992–93, I announced last September that there would be new money for this financial year from the crimefighting fund to provide 5,000 additional recruits over and above forces' existing plans. The Chancellor of the Exchequer's Budget in March ensured that that recruitment could be accelerated from three years to two, starting this April. Today, I am able to announce funding for a further 4,000 recruits over and above those already planned, taking the total to an additional 9,000 recruits by 2003–04.
Following changes made in the law by the previous Administration in 1994, the Home Office since then has had no direct legal control over police numbers, so predicting future numbers is very difficult, but the investment that I have announced today, alongside the investment announced earlier in this and the last financial year by the Chancellor, provides the funding to enable chief constables to raise officer numbers to record levels by the end of the settlement period. That significant boost for police recruitment will also help the service to achieve the targets that I have set the police forces to improve the recruitment and retention of more black and Asian officers.
As I have already told the House, in the Metropolitan and City police areas, which have both suffered particular recruitment problems, a £3,329 increase in the London allowance for new recruits and for those who joined after 1994 was brought into force on 1 July this year. However, if we are to get the best from our police officers, as well as funding more police officers, we must ensure that they are properly equipped with the most up-to-date technology.
A key part of that drive is to provide the police with more reliable, better-quality radio and data communications. The new public safety radio communications system—PSRCS—given the go-ahead by me in December, will give officers in rural and urban areas alike fast secure digital communications and access to local and national databases, saving them time and improving their safety. As a national system, it will also provide effective communications between individual forces.
Funding for the new system for this financial year from the capital modernisation fund was announced last September, but I accept that the service needs reassurance about the medium-term funding for that system as well. I am therefore glad to tell the House that the Government are making provision to meet the costs of the new PSRCS. That will amount to around £500 million over the three years of the settlement.
In addition to meeting the core costs of the system, which will be paid centrally by the Home Office, this funding will provide for expenditure by police forces on local service requirements, known as menu costs, and installation and equipment costs. I know that the service will accept that, as a result of this investment in the police, the public will expect improved outputs.
Research evidence and our own common sense tell us that increasing the likelihood of bringing criminals to justice is key to reducing offending and reoffending. However, in the 1980s and early 1990s the number of offenders convicted fell by a third, while crime doubled.
We are determined to improve detection, especially of serious and of persistent offenders. An important new target for the whole of the criminal justice system, set out in yesterday's White Paper, is therefore to increase the number and proportion of recorded crimes for which an offender is brought to justice. To help achieve this, we are making additional investment in the DNA database, in the number of scenes of crime officers, and in information technology systems, better to link up parts of the criminal justice system.
Our plans also include a substantial investment allowing the Crown Prosecution Service to integrate with its criminal justice system partners and play its full part in improving the performance of the criminal justice system as a whole. Cross-criminal justice system working will be helped by the 2.5 per cent. annual real-terms increases for the courts.
The settlement will also enable us to do more to help victims. It introduces for the first time a joint criminal justice system reserve of £100 million for 2001–02; £200 million for 2002–03; and £225 million for 2003–04. The Lord Chancellor, the Attorney-General and I will together manage this fund. The reserve will provide us with much greater flexibility and will mean that we will be able to respond effectively to new pressures on the system as they arise.
Let me come on to wider issues. A key part of the Crime and Disorder Act 1998 was to establish crime reduction partnerships in every district of England and Wales, to ensure that local authorities and other local agencies worked better to support the police in the fight against crime and disorder. A total of 376 partnerships are now established.
To reinforce the partnerships' work we have, since the 1998 comprehensive spending review, invested significant resources under the Government's crime reduction programme. This includes £150 million on the biggest-ever expansion in closed circuit television; £60 million on securing two million homes in 400 high crime areas to prevent domestic burglary; and £35 million on targeted policing initiatives, including the Cardiff scheme to reduce alcohol-related violence.
This targeted approach has already paid dividends, with domestic burglary across England and Wales down by 24 per cent. since April 1997 to its lowest level for a decade, and a 17 per cent. reduction in vehicle crime over the same period.
Over the coming three years, we will be investing £300 million a year on dedicated programmes to reduce crime, targeting, among other things, vehicle crime, domestic burglary, robbery, and violent crime more generally. This £300 million will also be used to tackle drug abuse and drug-related offending, and to improve the way in which we deal with young offenders.
The youth justice system in place when we took office in May 1997 scarcely deserved that name. It was a shambles, and we are significantly reforming it. We are also delivering on our pledge to halve the time that it takes to deal with persistent young offenders, from the wholly unacceptable 142 days—20 weeks—that we inherited.


The latest figures show that by March this year, the average time was already down more than seven weeks to 94 days.
As the House is well aware, the approach of other public services has an important influence on levels of crime and disorder. Truancy from schools, substance abuse and poor housing design all affect the environment in which crime breeds. Violent crime imposes great costs on the national health service. All relevant Departments therefore now have crime reduction targets. Extra resources are being provided to support crime reduction initiatives in the main programmes of other Government Departments, especially Health, Education and Employment, and the Environment, Transport and the Regions. However, behind much local crime and disorder is more organised crime—highly sophisticated or high-volume crime being run by a relatively small number of criminals.
In June, I announced the Government's plans to confiscate the assets of such criminals. My right hon. Friend the Chancellor's settlement yesterday provides for the funding of a dedicated national confiscation agency, and £15 million, £18 million and £21 million over the settlement period to pay for that agency.
I turn to prisons and probation. The effective punishment of offenders is a key part of our strategy to reduce crime. We have already implemented minimum sentences for drug dealers, burglars and serious sexual and violent offenders; we have brought in other tough provisions against sex offenders; and, with the Bill currently before Parliament, we are strengthening community punishments.
The settlement of my right hon. Friend the Chancellor yesterday provides for an additional £240 million, £380 million and £470 million for prisons and probation. This will increase capacity, boost the "what works" programme to reduce offending, and support the modernisation of the probation service. A new building programme for the Prison Service and other arrangements will provide 2,660 additional places on top of the 1,400 new prison places that will be brought into place next year.
As the House is aware, the statistics for the latest recorded crime levels for England and Wales showed a 3.8 per cent. increase in the period March last year to March this year. I am the first to accept that more needs to be done to tackle the problems which can undermine our communities and wreck people's lives.
We have put in place a comprehensive strategy to bring sustained, long-term benefits in crime reduction, and to buck the long-term trend in
crime.
Overall recorded crime is still 6 per cent. lower today than it was when we came to office. Where the police and others have targeted those crimes which affect people most, we have seen important successes. Our programme announced today lays out arrangements to build on that success.
The major investment that I have outlined will ensure that the police are better funded and better equipped than they have ever been before, and that all sections of the community and all other public services give the police proper support in the fight against crime. I commend the plans to the House.

Miss Ann Widdecombe: I think that the reaction of most people listening to that

announcement will be that they have heard it all before. Last year, announcing rises in police spending, the Home Secretary said:
This is a fair settlement which will ensure that the police have the resources they need to fight crime and disorder across England and Wales.
Result? A 4 per cent. increase in crime.
At the Labour party conference, the right hon. Gentleman, amidst a fanfare of trumpets, announced an additional 5,000 police recruits and boasted how he had secured the funding. Result? A drop of 1,600 police over the last year.
The right hon. Gentleman has announced money to help local councils to fund the asylum system. Result? An Audit Commission report painting the picture of an asylum system that is out of control. He has announced money for more immigration officers. Result? Double the backlog. Here we are again today with major announcements. I shall press the right hon. Gentleman for the story behind the latest figures.
The increases for the police, which the right hon. Gentleman has presented rather selectively, are in cash terms. In real terms, will he confirm that they represent 3.8 per cent. over three years? Will he confirm also that that is exactly what the Conservative Government spent on average year on year between 1987 and 1996? Is he not just announcing a return to normal?
How much of the rise that the Home Secretary has announced will be taken up by pensions? He passed over that subject by acknowledging the problem, but he did not say how much of the money will be dedicated to pensions. How much of the money will he spend on salary rises? When he has taken from the money the half a billion that he has just announced for the public safety radio communications project, the extra money needed for pensions and the extra money needed for salary rises, how much will be left over the three years as extra money dedicated to fighting crime?
How much of the planned increased expenditure on asylum is earmarked for planned detention centres in Kent, Bedfordshire, Doncaster and possibly elsewhere? What level of asylum applications is the Home Secretary assuming in his figures? Is he assuming more asylum seekers, the same number of asylum seekers or fewer asylum seekers?
We are well used in this Government to the Chancellor of the Exchequer disagreeing with the Prime Minister and to the Prime Minister disagreeing with the Foreign Secretary, but let me ask the Home Secretary whether he agrees with himself when he said:
The amount of money you put into the police doesn't necessarily change outputs.
How right he was.
Has the Home Secretary not brought about the present position through a series of measures that have been designed to encourage the criminal rather than the crimefighter? [Interruption.] When Labour Members start bellowing, we know that they do not want to hear what is being said.
Is it not the case that the Home Secretary inherited a situation in which the number of constables on the beat was rising, and that he has let their number decline? Has he not decided and put into law a provision to let criminals, including violent criminals and criminals


convicted of homicides, out even before the halfway point of their sentences? Is not the message that he has sent the criminal, "There are fewer people out looking for you. But, even if you're caught, don't worry. You will never have got out so early in your lives"? Is that not the sort of message that militates against every penny that the right hon. Gentleman puts into policing? Is it not true that money is not a substitute for a common-sense approach?
As the Home Secretary announces a real increase that does not differ from the spending that took place for a vast amount of the time that we were in office, is he not embarrassed by the fact that, in his memorandum, the Prime Minister homed in on the failures of the Home Office as a reason for the public holding the Government in contempt? There has been a 26 per cent. rise in robberies, but the Home Secretary told us in his spending announcement last year that the police have enough money to fight crime effectively. There has been a 16 per cent. rise in violent crime, but he told us last year that his new recruits would make a difference. There has been a 4.5 per cent rise in sex crimes, but he lets criminals out early before the end of their sentences.
There are one or two measures in the announcement that we can welcome—if they happen. If it happens, we welcome the investment in the DNA database.
May I press the Home Secretary on his announcement of money for prisons in which he said that some of it—he was not explicit how much—would be devoted towards "what works", that is to say towards constructive prison regimes and the treatment of offenders? Will he accept that much of that money will have to make up for the huge decline that there has been in the purposeful activity that has taken place in prisons under his stewardship? It has fallen from a peak of 26 hours in our last Parliament to 22 hours now, under his stewardship. Overcrowding is rising, suicides are increasing and conditions in our prisons are such that if they had prevailed under us, the Home Secretary would never have stopped talking about them. We have not heard much talk since he came to office.
Will the Home Secretary admit that he is now taking the people's money to clear up the mess created by Labour politicians? Once again, he stands up, announces money and tells us that everything will be all right tomorrow. His promises on crime have as much credibility as Billy Bunter's postal order.

Mr. Straw: First, the shadow Home Secretary tries to trade statistics and compare our record on crime with that of the Conservative Administration of whom she was a member. Frankly, that is one of many unwise escapades on which she is embarked. The simple and indelible truth is that crime under the Conservatives doubled while the number of people convicted fell by a third.
if the right hon. Lady wants to consider the different Administrations under Mrs. Thatcher and the right hon. Member for Huntingdon (Mr. Major), the contrast is even more acute. In the first three years of the Thatcher Administration, crime rose by 21 per cent; in the first three years of the Major Administration, it increased by 42 per cent; in the first three years of this Labour Administration, it has fallen by 6 per cent. [HON. MEMBERS: "Read the memo!"] Hon. Members say that I should read the memo; what I should like to see are the memos that pass between the shadow Home Secretary and

the right hon. Member for Kensington and Chelsea (Mr. Portillo), the shadow Chancellor, who has now fled the Chamber.
What the right hon. Member for Maidstone and The Weald (Miss Widdecombe) was forced to say today is completely the reverse of what she said only six weeks ago, when, in answer to a question from Mr. John Humphrys on "On the Record", she said that Conservatives were promising more money on health and education and, we are promising more money on law and order.
What is she promising now?

Miss Widdecombe: Finish the quote.

Mr. Straw: If the right hon. Lady wants me to finish the quote, I shall. She said:
we are promising more money on law and order, but our promises on health and on education and the other things are to honour existing promises on spending, so it's not that much extra.
Is she promising more or not? Earlier in the same interview, the right hon. Lady simply said:
We will spend more money on law and order.
She then moved on to the next question. Today, she says that money is no substitute for a common-sense approach. Is she now saying that thin air, waffle and what she describes as Conservative common sense are expected to pay for the 9,000 additional officers, the £500 million on the police radio and everything else that we are investing in a 21 per cent. increase in spending on the police in the next three years?

Miss Widdecombe: Where are the recruits?

Mr. Straw: We have always made it absolutely clear that the money that I announced last September would be available to spend this financial year. We expected police numbers to fall in the previous year. That is why we have provided additional funds, and not only allocated but increased the money for the next three years.
The right hon. Lady said that she welcomed some of our spending. She mentioned only two items: the spending on the DNA database and some of the spending on prisons.
We did not hear whether she welcomed the significant 20 per cent. cash increase in spending on the police and whether she and her right hon. Friend the shadow Chancellor intend to match that spending in the very unlikely event of their gaining office. Will they match that spending?
The simple truth—as we learned yesterday from the shadow Chancellor—is that given the Conservatives' commitment to cut £16 billion from my right hon. Friend the Chancellor's promises and given that the shadow Home Secretary has already pledged to increase spending on asylum by £3 billion on detention places and £500 million on the restoration of cash benefits for asylum seekers, there is no way in the world that she could match that spending.
I hope that this will be the last we shall ever hear of the right hon. Lady, or any Opposition Member, complaining about a reduction in police numbers and a lack of investment in the police. What the British public know now—and will remember at the next election—is the appalling record of the Conservatives on crime and


disorder. During their time in office, crime doubled, while the numbers convicted fell by a third. Our programmes, announced today, will significantly increase spending so as to secure long-term reductions in crime and disorder.

Mr. Alun Michael: May I welcome the resources announced by my right hon. Friend and his emphasis on the need to target those resources on the real problems? He referred to the Cardiff scheme, which has brought about a cut in violent crime. Does he recognise that that initiative started with a surgeon in an accident and emergency unit and that the key to it was the enthusiasm with which the police, local authorities, people involved in victim support and nurses and doctors worked together to target the problems of violent crime in the area? Will my right hon. Friend encourage others to follow that example? Does he recognise that almost all the increased crime revealed by the figures yesterday is accounted for by three police areas—West Midlands, Thames Valley and the Metropolitan police? Will he work with the heads of those forces to see that the crimes that are responsible for those increases are targeted, particularly in view of the fine record of the current Commissioner of the Metropolitan police on crime reduction?

Mr. Straw: I greatly commend the initiative in Cardiff under the leadership of Professor John Shephard. I am happy to say that, under the crime reduction programme that my right hon. Friend the Member for Cardiff, South and Penarth (Mr. Michael) introduced, we are helping to fund that important new initiative to get violent crime in the Cardiff area down. It is an important example to the rest of the country.
My right hon. Friend referred to the significant variations in performance of otherwise similar police force areas. He is right to say that the increase in crime in the Metropolitan police area, Thames Valley, West Midlands and one other area is more than equivalent to the total increase in recorded crimes during 1999–2000. If one looks at the overall figures, it is striking to notice that, in some of the 18 police force areas—including the police force area of Kent, represented by the shadow Home Secretary—there have been small reductions in crime in the last few years. In Kent, there has been a 24 per cent. reduction in crime, despite that force having a similar level of resources to others.
I recognise the importance of increasing spending, provided it is spent properly. However, I wish to underline to the House the great importance of ensuring that every police district achieves the best and follows the example of the best. I draw the attention of the House to the comparisons that we included at the back of the crime statistics, which assemble the police districts into what are called statistical families so that each hon. Member, and members of the public, can compare police districts. The striking differences between police performance, given similar resources, makes interesting reading.

Mr. Simon Hughes: Of course the additional resources will be welcomed by the Liberal Democrats, as they will be by people outside the House. Given the Home Secretary has

said that we have lost 1, 700 police officers over the past year, and 2, 700 since the election, and given that that is 400 below his estimate of the current numbers that we should have had, can he give us the missing figures between now and 2004, when he expects numbers to be at a record level? What are the Government's estimates for the numbers in March 2001, 2002 and 2003?
Secondly, why will the real-terms increase in the police budget over three years be 3.8 per cent., while the average increase in the Home Office budget as a whole is 6.4 per cent? Why will the police receive less than the rest of the Home Office, in relative terms?
Thirdly, let me return to a question that has already been asked. If we take out the cost of the pensions budget and other administration and salary costs, what is the net increase in provision for front-line policing? That is the phrase that the Home Secretary used, and he said that it was a priority.
Fourthly, let me ask a question about prisons. If we take out the additional cost of places and the security required to keep people in them, what additional money will be spent on constructive work programmes or on helping to prevent reoffending by prisoners, either when they are inside or when they have been released?
Fifthly—if the right hon. Gentleman cannot give a full list now, perhaps he will do so later—what changes have been made in targets? The target that he mentioned—to
increase the number and proportion of recorded crimes
for which offenders are brought to justice—is laudable, but no figure has been set. As the right hon. Gentleman will know, the current figure is only 3 per cent., which is extraordinarily low.
Finally, let me ask about victims, whom the right hon. Gentleman rightly mentioned. He has allocated a sum to the Lord Chancellor. Can he tell us how that money will be spent, and whether it will include more resources for legal aid? Would it be reasonable to conclude that from now on the right hon. Gentleman and his Department will spend less time on soundbites and suggestive gimmicks in dealing with the Government's requirement to be tough on crime, and more time dealing with the underlying causes of crime and developing the long-term strategies which, as the right hon. Gentleman knows, are what the country really needs?

Mr. Straw: The hon. Gentleman has spoilt a series of intelligent questions—more intelligent than what was said from across the Gangway.

Miss Widdecombe: I asked exactly the same questions.

Mr. Straw: The right hon. Lady is twittering that she asked the same questions, but she did not. The one thing she did do was avoid saying whether the Conservatives would match our spending.
There is no point in the hon. Member for Surrey Heath (Mr. Hawkins) shaking his head. The key question between now and 10 pm on election day is "Will the Tories match our spending on the police—and, if so, what other spending will be cut?" [Interruption.]
Let me return to the hon. Member for Southwark, North and Bermondsey (Mr. Hughes), and answer his questions while I have the necessary information to hand. He asked


me about accredited educational and vocational qualifications. The plan is to provide for 23,400 in 2001–02, rising to 36,200 in 2003–04. That will include an increase in the number of level 2 basic skills awards from 18,000 to 21,000.
The hon. Gentleman asked what the additional funds were likely to provide for victims. They will allow the victim support magistrates courts witness service to be completed in all 430 magistrates courts, and an improvement in specialised support services for both victims and, for example, vulnerable or intimidated witnesses. They will also enable work to take place with victims participating in restorative justice measures, and will provide for recording of pre-trial cross-examination of child witnesses on video and the use of intermediaries to assist children to give evidence in court.
That last point is very important if we are to secure more convictions of sex offenders and paedophiles. One of our main difficulties at present is that of providing a safe and secure environment in which children can give evidence, and ensuring that it is proper evidence for the use of the court.
The hon. Gentleman asked a number of other questions. He asked about police targets, and wanted to know what my announcement today about the number of police in March 2000—it is about 400 below the original projection, which was published late last year—meant for the other projections under the crimefighting fund. It means, broadly, that there will be 400 fewer officers at each point in time. I shall provide additional information on that as soon as we have it.
We have reasonably reliable information for this financial year and for next financial year. However, the hon. Gentleman will understand that, for future years, we are dealing very much with projections, particularly because the police service does not know funding levels for 2003–04. Soon, we shall be consulting with the police service on the method of allocating the crimefighting fund recruits for that year. I shall ensure that the House is made aware of how that money is made available.
The highest previous recorded level of police officers—which was reached, I think, in 1993—was about 128,200. As I explained, we anticipate that, in 2003–04, as a result of the announced substantial additional funding, police officer numbers will increase above that level to the highest ever levels.
The hon. Member for Southwark, North and Bermondsey talked about the real-terms increase in funding—which, as was made clear yesterday, represents an average annual increase of about 3.8 per cent. over the next three years. That is supplemented by the significant increases in the crime reduction programme—which is not directly part of the police budget—and by money that we are allocating to deal with drugs, which is also very important. The 3.8 per cent. increase also has to be seen against a baseline that we have already increased by £19 million, or more than 1 per cent, in the current financial year.
The hon. Gentleman asked about pensions. As for his general point, I am satisfied that the increases of 20 per cent. in cash, with a very substantial boost of 10 per cent. for next year alone, are sufficient to take account of what I call prior charges on police budgets—typically, pensions, pay rises and the police radio system. Those

increases will also pay for additional police numbers. The great restraint on those numbers is simply the capacity of the training estate.

Mr. Robin Corbett: May I tell my right hon. Friend that people in communities in my constituency are deeply unimpressed by slanging matches on crime between those on the respective Front Benches? They are much more confident about what the Government have done in the Kingstanding area of my constituency, for example, to reduce domestic burglary by about one quarter in the past three years—although none of us takes any satisfaction from the contribution to the overall increase in crime made by villains in the west midlands.
Given that the Home Secretary said that crime rates have fallen in 18 of 43 police areas, what work is being done by either the Home Office or the police service itself to learn lessons from those areas and to identify best practice that can be applied elsewhere? Although it is a little early, can he also say what conclusions he draws from the first year of operation of the community safety partnerships and the good work that they are doing in their areas to respond to community demands on how local police should behave?

Mr. Straw: As to how we use best practice of one force area to raise performance in other areas, huge work is being done—partly in the context of best value, and partly, in the wider context, led by the inspectorate of constabulary—to draw forces' attention to best practice and to get them to apply it.
We shall shortly be publishing the very important report of the inspectorate of constabulary on the performance of basic command units. That report shows that similar basic command units, in similar areas and with similar resources, perform very differently. It is at that level—just as it is at the school or hospital level, where the health and education services are improving performance—that real improvements can be made.
The community safety partnerships, which have been operating for just over one year now, are working well. In those areas where they are working particularly well, district councils, police and other agencies, including the health and education services, are making a major contribution to the reduction in levels of crime and disorder. That is shown, for example, in the increasing use of anti-social behaviour orders. Major reforms in the youth justice system are also helping to drive down offending and re-offending by young offenders.

Mr. Michael Howard: Will the Home Secretary acknowledge that in the last four years of the previous Government crime fell by nearly 20 per cent. and the number of police constables increased in every single year? Two months ago, the chairman of the Police Federation told the Home Secretary,
I have never known greater uncertainty, greater dissatisfaction and a greater sense of despair than exists here and now.
Does the Home Secretary absolve himself from responsibility for that sense of despair?

Mr. Straw: If the right hon. and learned Gentleman looks back at what representatives of the Police Federation say each year, he will see that they said much worse things of his stewardship.

Mr. Howard: indicated dissent.

Mr. Straw: Oh yes, they did, especially around the time that he implemented the ill-advised Sheehy report, which has been the main cause of the recruitment and retention crisis, especially in the metropolitan areas, and which it has taken me to readjust. If the right hon. and learned Gentleman wants to trade police numbers, the simple truth is that when he came into office as Home Secretary in spring 1993 police numbers stood at 128,300. By the time he left office, under the budget that he established—which, he should remember, he promised would lead to an increase of 5,000 extra officers—the number of officers had fallen by 1,400. The current settlement represents the best increase in the funding of the police service to achieve record numbers of police officers that this country has ever seen.

Mr. Gerald Kaufman: When my right hon. Friend comes to my constituency to discuss law and order, as he has kindly promised to do, will he explain to my constituents why the Liberal Democrats ask him to be tough on the causes of crime but voted against the financing of the new deal, which has reduced youth unemployment in my constituency by 61 per cent.? While my constituents welcome the projected increase in police numbers in Greater Manchester, and also the reduction in burglary in the C division by 34 per cent., will my right hon. Friend accept that they are still deeply worried by disruptive behaviour and would like to see the greater invocation of anti-social behaviour orders and curfews and an increase in the age of curfew applications to teenagers? Will my right hon. Friend consider how he can augment the triggering of those welcome actions that were included in the Crime and Disorder Act 1998?

Mr. Straw: When I come to my right hon. Friend's constituency on Saturday, I will discuss with him and, as importantly, his constituents what has been done in the area to bring burglary down and what still needs to be done to get on top of the long-term trend in crime. He is right to tease the Liberal Democrats who, as always, want things both ways. They want us to be tough on the causes of crime, but they do not want to be tough in the methods by which we bear down on those causes. I remember my right hon. Friend the Chancellor of the Exchequer saying that the welfare-to-work programme was as much an anti-crime programme as it was an economic policy. Putting 1 million people back into work and bearing down on the scourge of long-term unemployment, especially among the young, is profoundly important in securing a decent civic society and binding people into a common set of values. It is without that common set of values, including a sense of responsibility, that an environment develops in which crime breeds.
I can tell my right hon. Friend that we want to see local districts and the police service making better use of the powers that we gave to local authorities and the police, as they requested—although we did not direct them to use the powers—where they feel appropriate. There is not the least doubt that in those areas where the authorities are

using those powers, especially anti-social behaviour orders, big differences have been recorded in levels of crime and disorder. I hope that a good debate will develop in Greater Manchester that compares levels of performance in the local districts with comparable districts elsewhere, so that where burglary, vehicle and other crime rates appear to be significantly higher, the police and local authority can discuss and determine what actions they will take to reduce those levels.

Several hon. Members: rose—

Mr. Deputy Speaker (Sir Alan Haselhurst): Order. May I appeal to hon. Members to up the tempo? Short questions and short answers enable me to call more hon. Members than would otherwise be the case.

Mr. Douglas Hogg: Is the Home Secretary aware that on 1 May 1997 the Lincolnshire police force had 1,221 officers, and only 1,145 on 1 May this year? That reduction, of 76 officers or just over 6 per cent., is the second largest in England and Wales. When can the Lincolnshire force reasonably expect to have the same number of officers that it had when the right hon. Gentleman came to office? Will the Home Secretary guarantee that the next settlement will incorporate the sparsity factor recommended by his own external consultants?

Mr. Straw: On the right hon. and learned Gentleman's final point, we are announcing tomorrow the allocation of the £15 million for rural police force areas that is additional to the current standard spending assessment. That will help rural areas. Longer-term reform of the SSA will be announced in due course, but the Government fully accept that rural areas have special needs. We have taken them into account in the settlement.
The figures in the crimefighting fund provide for increases for Lincolnshire this year, next year and the year after. However, between 1998–99 and 1999–2000, the Lincolnshire force has enjoyed budget increases that are among the largest—of 4.5 per cent., compared with an average across the country of 3.1 per cent. Ultimately, the allocation of cash to officers, equipment and other expenditure is, by law, a matter for the chief constable and not the Home Office.

Mr. Gerry Steinberg: I also welcome my right hon. Friend announcements, but the biggest complaint at my surgeries in the villages around my constituency has to do with youngsters' disorderly and unruly behaviour. At a recent meeting, the divisional commander for my area put that problem down to a lack of policemen and to the huge amount of paperwork needed to bring those responsible to court. He was very complimentary about the fast-track system that the Government have introduced for young criminals, and said that youths were now being brought to court very quickly. However, he said that the big problem was that there was nowhere to send the ones who were found guilty, with the result that they were soon back on the streets.
Do my right hon. Friend's announcements today mean that the problems that I have described will be solved, in my constituency and elsewhere?

Mr. Straw: I must advise my hon. Friend not to take at face value suggestions by the officers of any public


authority that the only reason for their failure to perform at a certain level is the lack of resources. He ought to compare the relative performance of his police district with that of other, similar, forces. The detailed statistics show that otherwise similar areas perform very differently. I do not think that Durham's police problems are worse than those in my own constituency of Blackburn. However, excellent policing in my constituency—where resources are lower than in most areas—and good partnership work with the Blackburn and Darwen district council has meant that virtually every category of crime has fallen. The force in my area makes full use of the powers available.
On youth justice, the Government are now giving the Youth Justice Board an annual budget of £230 million, including £190 million for the juvenile secure estate. The previous Administration did not properly organise the juvenile secure estate and did not implement powers to allow magistrates to remand into secure custody the so-called bail bandits—people who are arrested one day, charged the next, taken into court the next and then let out on bail. This Government have given the courts clear powers to remand young criminals directly into secure custody. Since June, the Youth Justice Board has had the power, duty and money to ensure that those places are available—in Durham as elsewhere.

Mr. Gerald Howarth: The Home Secretary has made much-vaunted claims about increased expenditure leading to improved performance, but he has completely failed to deliver. We have fewer police and rising crime, and less purposeful activity among prisoners. Why should we believe that the latest increase will make any difference?
Will the right hon. Gentleman share with the House further thoughts on recruitment? He claims that he will have the funds for 9,000 extra recruits; we presume that that has been cleared with the Economic Secretary to the Treasury, unlike the announcement last September. Why should we believe his claims about extra recruits when the numbers for Hendon are plummeting, and there is a real problem with retention in my county of Hampshire because the allowance provided for London officers is not provided for Hampshire officers, and Hampshire officers cannot afford to make their contributions to their pensions?

Mr. Straw: I understand the funding problems that the police have faced and I made it clear in the settlement that I laid before the House in December 1998 that the spending increase for the three years from 1999–2000 was, at 2 per cent., small—that was the word I used. However, the last people in the world able to complain about police funding are Conservative Members of Parliament. It is no good the hon. Gentleman waving his hands. The straightforward truth is that his right hon. Friends promised to increase the number of police—constables and every other rank—when they were in government. On 27 January 1997, the right hon. Member for Maidstone and The Weald promised 5,000 extra officers over three years. However, no money was provided to meet that target. The difference between us and the Conservatives who preceded us is that we have spent more than they pledged to do. The hon. Gentleman faces the problem faced by every Conservative Member of Parliament: how, on the one hand, to call for more spending than I propose and infinitely more than the right

hon. Lady recommends and how, on the other, to support the shadow Chancellor, who does not want spending to be increased in any of those areas, but instead wants to cut it by £16 billion.

Dr. George Turner: My right hon. Friend will be aware of my interest in rural policing and that, as well as general issues, the case of my constituent, Tony Martin, raised specific issues relating to the difficulty of policing in the fenland, where three police authorities have to co-ordinate their activities. I raised that matter in an Adjournment debate some months ago, when the Minister of State, Home Office, my hon. Friend the Member for Norwich, South (Mr. Clarke), assured me, as he has done every week since, that active consideration is being given to the Norfolk police bid for extra help to address that specific problem. The community safety partnership meets tomorrow; can I give them any good news after the Chancellor's announcement of extra finance for the police?

Mr. Straw: My hon. Friend can take his community two pieces of good news. First, my announcement today will have a direct impact on the Norfolk constabulary by ensuring that it can put in place a good police radio system, that it is better able to detect and prevent serious crime, and that officers numbers increase. In addition, I am pleased to tell him that, today, we have agreed to allocate £600,000 to a targeted policing bid jointly submitted by the Cambridgeshire, Lincolnshire and Norfolk constabularies. That programme, which is not part of the spending review, focuses on problems of crime in rural fenlands and is an excellent example of collaborative work between the three police forces in the area. I hope that my hon. Friend finds that news welcome.

Sir Peter Lloyd: Would not the money that the Home Secretary has earmarked for new prison places be better spent on providing suitable accommodation for the large number of mentally disordered offenders who are currently in prison but ought not to be held there?

Mr. Straw: I accept that there are people in prison who ought to be in the mental health system. We transfer a significant number of such people every year into the hospital system and I work closely with my right hon. Friend the Secretary of State for Health to ensure that prisoners who are inappropriately held in prison are transferred to where they should be. However, if we are to bear down on criminal activity—not only by serious criminals, but by persistent criminals for whom probation and other community punishments plainly have not worked to prevent their reoffending—there has to be an increase in the number of prison places. That is why we have put in place funding for the 2,600 places that I have announced today, in addition to the 1,400 places that are currently being built and will be open next year.

Mr. Geraint Davies: Is my right hon. Friend aware of partnership initiatives in Croydon, and will he consider the initiative to use domestic camcorders, issued by the council or the police, so that members of the public may survey areas that have


habitual graffiti problems? That would allow citizens to gather evidence and deter criminals and help to bring them to justice.

Mr. Straw: Yes, I welcome the initiative taken by the police and the partnership in Croydon to use domestic camcorders and involve willing members of the public in detecting terrible crimes and lower level disorder.

Mr. Simon Thomas: I welcome in general today's announcement, particularly the reiteration of the need to take account of the sparsity factor affecting rural police forces in Wales. Does the prison programme that the Home Secretary mentioned include the proposed new prison for north Wales, and will that prison be built under the private finance initiative?

Mr. Straw: No, the programme does not specifically include that prison, but I shall be happy for my right hon. Friend the prisons Minister to discuss that matter with the hon. Gentleman.

Mr. Dale Campbell-Savours: I have a short question. Now that my right hon. Friend has the money to do it, may we have a project to evaluate the benefits that would arise from the introduction of national identity cards?

Mr. Straw: I do not have the money for that.

Points of Order

Miss Ann Widdecombe: On a point of order, Mr. Deputy Speaker. I am aware that you are not responsible for the nature of ministerial replies, or for their veracity or accuracy. May I ask, however, whether it is not a contempt of the processes of Parliament for a Minister's reply—as in the answers to detailed questions put by me and by my right hon. and learned Friend the Member for Folkestone and Hythe (Mr. Howard)—to be not even remotely relevant to the question?

Mr. Deputy Speaker (Sir Alan Haselhurst): The right hon. Lady knows that the Chair has absolutely no responsibility for questions or answers.

Mr. Douglas Hogg: On a point of order, Mr. Deputy Speaker. I know from what you said during the statement that the slow process of business concerns you. It took 42 minutes to complete the initial statement and the responses to two questions today. That is appallingly slow. What can the Chair do to ensure more expeditious process of business? Perhaps, if need be, you could call participants to order.

Mr. Deputy Speaker: Madam Speaker has asked Ministers to try to limit the length of statements so that everything that follows can be dovetailed with the length of the statement. Clearly, if a statement is long and complex, the first response from the Opposition Front Bench will also take some time. Over the years, it seems that statements have become longer, and questions have certainly become longer. Members have fallen into the habit of asking multi-part questions that require multi-part answers. The whole process could be speeded up with good will on both sides of the House, and the Chair is dedicated to that end.

Dr. Evan Harris: On a point of order, Mr. Deputy Speaker. On 6 July, I drew your attention to the fact that the Government appeared to have announced £1 billion-worth of public spending in science without making a statement to the House or supplying a written answer. You reminded us that Madam Speaker had deprecated such practice. Have you had any reply from the Government on that point, and how do you view the Government's boast in a press release yesterday that they were proud to have made their announcement at the United Kingdom-United States conference on 5 July?
In addition, is it not significant that there have been other occasions on which the Government have boasted about public spending announcements made to the media rather than the House? It is usual for press releases on Government spending to include significant detail in the paperwork attached to them so that hon. Members may receive it at the same time as the media. However, the Department for Education and Employment press release on the spending review's £100 million for higher education was not made available to Members yesterday although it was available to the media.

Mr. Deputy Speaker: I am sure that those on the Government front Bench will have heard the point about


the availability of detailed information which comes out in the form of press releases. No doubt I am merely echoing what Madam Speaker has said on more than one occasion, but it is important that that information should be available to hon. Members at the same time as the press releases come out. There is nothing particularly unusual in a head announcement being made about a general direction of policy in a Budget or expenditure review, and for the detail to be followed up within hours by another Secretary of State or by a later announcement in the House.

Mr. John Bercow: On a point of order, Mr. Deputy Speaker. In the light of detailed newspaper reports at the weekend, have you received any requests from the Secretary of State for Education and Employment asking to come to the House to make a statement about his curious failure to declare in the Register of Members' Interests his receipt of rental income?

Mr. Deputy Speaker: No. There is a proper procedure for dealing with complaints of that kind.

Fire Safety (Houses in multiple Occupation)

Ms Karen Buck: I beg to move, That leave be given to bring in a Bill to require the installation of smoke detectors in houses in multiple occupation.
On Friday evening, I attended the 30th anniversary celebrations of the North Kensington law centre to congratulate it on three decades of effective campaigning in the interests of some of the most deprived people in Britain. At that event, there was a screening of a Granada television documentary about the needs that gave rise to the establishment of the law centre. In watching it, I could not help but be struck by similarities and differences between the events of 1970 and those of today.
One striking feature was the fact that, in 1970, everybody in the video appeared to be dressed as an extra from "Hair". More significantly, the documentary revealed the drama of prevailing housing conditions in our cities at that time, and showed that we were dealing with the legacy of slum landlords such as Rachman and Hoogstraten, who made Notting Hill and Paddington notorious. That sector has now shrivelled away and social landlords have largely filled the gap.
In 1970, people dealt with the drama of appalling fires that ripped through multi-storey rooming houses. They were rabbit warrens of rooms in interconnecting houses, through which fires moved with terrifying speed and ferocity. Fire brigades were handicapped in their dealings with the situation by knowing nothing of the floor plans. Clanricade gardens in north Kensington and Clifton villas in Paddington are dreadful examples of what could happen to under-regulated properties of that kind.
Thirty years later, the position is less visibly dramatic, but the underlying situation is just as bad and, in some cases, worse. Too many dwellings in multiple occupation are still appalling and are high risk for too many people. The number of people dying in, or injured by, domestic fires remains unacceptably high across the board, but fires in houses in multiple occupation occur out of all proportion to the size of the sector. In 1998, the last year for which figures are available, there were 10,463 fires which involved casualties, up from 9,008 five years previously. In 1998, 506 people lost their lives in domestic fires, up from 488 five years before.
Especially worrying is the fact that the proportion of fires involving HMOs rose from an already alarming 43 per cent. to 45 per cent. in 1998. Almost half of all domestic fires occur in HMOs. It is estimated that there are 550,000 houses in multiple occupation in this country, out of an estimated total of 20 million domestic buildings. The disproportionate occurrence of fires in HMOs should, therefore, be a matter of deep concern.
According to the research of the Department of the Environment, Transport and the Regions, the risk of death by fire in a house converted to bedsits is six times higher than in a single-occupancy property. For homes of three or more storeys converted to bedsits, the risk is a staggering 16 times higher. If we allow for the fact that the Department estimates that only about one in six domestic fires is reported to the fire brigade, we get a very disturbing picture.
Safety should be a major consideration whoever occupies the household, yet as a society we accept a particular responsibility for the vulnerable. HMOs are likely to be occupied by students, young people trying out their first home independent of their parents, and people with mental or physical disabilities seeking life outside a residential situation. In my street, until only a year or two ago, there were three-storey houses converted into 12 or more rooms, occupied by Irish pensioners who had come to this country 40 years ago to work in the construction industry, and who had never had a bathroom or kitchen in their own home. Even now, in cities and seaside towns it is not uncommon to find houses with 12 or more names taped next to the doorbell.
Those properties are more likely than average to represent a fire risk, as the casualty figures show, because of a combination of the built environment and the behaviour of tenants—not because HMO residents are intrinsically more likely to indulge in risky behaviour, but because of the impact of numbers. A two-storey HMO occupied by two people in converted flats is less risky than the same property occupied by eight people. Buildings of four or five storeys, buildings converted into bedsits and those occupied by vulnerable tenants are most at risk.
My Bill would require a comprehensive licensing scheme for HMOs, wherein one of the conditions for licensing is the fitting of smoke or heat detectors, mains powered and, where necessary, linked to each other and including the common parts. Local authorities already have a number of powers available to them by virtue of building control and other environmental regulations, but the casualty figures show that they are not sufficiently effective. In addition, the relatively fluid nature of the HMO sector makes it unnecessarily hard for tenants and councils to enforce standards.
Local authorities have been running local registration schemes in the past few years to achieve the same end as licensing, but so far only 81 areas covering 10,000 HMOs are included. The process is hard going for local authorities. Officers whom I spoke to in one council told me of the problems that they faced. Of the HMOs that they had surveyed, only one in three was fully compliant with all the safety requirements, and only half of the registrable properties were fully fire safe. Penalties were too low to be an effective deterrent to bad landlords.
A recent survey conducted by the Brent private tenants group found that only two thirds of the group surveyed had smoke alarms fitted in their properties and less than half had such alarms in the common parts. Most tenants did not know whether the alarms were working or whether they were regularly tested.
We now know what needs to be done to reduce risk, especially in relation to fire hazards, and we have a good idea of the scale of the problem. I commend to the House Shelter's superb fire safety guide, which spells out the current requirements, best practice and options for improvement. Shelter's campaign for bedsit rights has been at the forefront of action on this matter for decades and has already brought about many changes. Now we need a clear, comprehensive, national scheme with sufficient resources for enforcement and tough penalties for breaches.
The introduction of a licensing scheme for HMOs was a manifesto commitment for the Government, and the Department has already consulted on principles that could underpin such a scheme. I welcome that, and I hope that we will succeed in getting a housing Bill in the Queen's Speech so that we can proceed with those plans. However, I am concerned that the Government's thinking may be too restrictive to meet the challenge. I believe that they envisage only about one fifth of HMOs being subject to mandatory licensing, which would certainly include many high-risk properties, but would exclude others, such as the two-storey HMOs that the Department's own research indicates account for 48 per cent. of all HMO fire deaths.
Two single tenants who rented a second-floor converted flat in north-west London had a narrow escape from fire recently only thanks to a smoke alarm fitted with great reluctance by their landlord, after months of letters and phone calls. Ten days after the alarm had been fitted, it activated at 3 am. One of the upstairs tenants said:
We couldn't find the fire, but we could smell burning and discovered that our bathroom floor was hot, so we guessed it must be coming from the flat below.
The tenants were able to wake the people in the burning flat who had no alarm system, so fortunately everyone escaped injury. The fire service said that if the tenants below had slept for another 15 minutes, they would have been dead. That property would not be mandatorily licensed as the proposal now stands.
My Bill would require all HMOs to be subject to a new national, mandatory licensing scheme with fire detection and safety at its heart. The licensing requirement would also help to cut accidents and injuries from other causes related to unfit property. I am mindful of the need to keep regulation to a reasonable minimum and to maximise effectiveness by targeting. However, I am ultimately persuaded of the need for a simple, clear and comprehensive scheme; the 4,274 casualties in HMO fires are worth it.

Question put and agreed to.

Bill ordered to be brought in by Ms Karen Buck, Mr. Iain Coleman, Mr. Hilary Benn, Mr. Adrian Sanders, Ms Margaret Moran, Mr. Jim Fitzpatrick, Mr. Andrew Love, Mr. Andrew Dismore, Angela Smith and Mr. Gordon Marsden.

FIRE SAFETY (HOUSES IN MULTIPLE OCCUPATION)

Ms Karen Buck accordingly presented a Bill to require the installation of smoke detectors in houses in multiple occupation: And the same was read the First time; and ordered to be read a Second time on Friday 21 July, and to be printed [Bill 165].

DELEGATED LEGISLATION

Mr. Deputy Speaker (Sir Alan Haselhurst): With permission, I shall put together the motions relating to delegated legislation.

Motion made, and Question put forthwith, pursuant to Standing Order No. 118(6) (Standing Committees on Delegated Legislation),

EXPORT AND INVESTMENT GUARANTEES

That the draft Export and Investment Guarantees (Limit on Foreign Currency Commitments) Order 2000, which was laid before this House on 27th June, be approved.

PUBLIC HEALTH

That the draft Vaccine Damage Payments Act 1979 Statutory Sum Order 2000, which was laid before this House on 5th July, be approved.—[Mr. McNulty.]

Question agreed to.

ADJOURNMENT (SUMMER)

Motion made, and Question put forthwith, pursuant to Standing Order No. 25 (Periodic adjournments),
That this House, at its rising on Friday 28th July, do adjourn till Monday 23rd October.—[Mr. McNulty.]

Question agreed to.

FINANCE BILL

Ordered,
That, notwithstanding the practice of the House as to the intervals between stages of Bills brought in upon Ways and Means Resolutions, more than one stage of the Finance Bill may be taken at any sitting of the House.— [Mr. McNulty.]

Orders of the Day — Finance Bill

Not amended in the Committee and as amended in the Standing Committee, further considered.

Schedule 8

EMPLOYEE SHARE OWNERSHIP PLANS

The Financial Secretary to the Treasury (Mr. Stephen Timms): I beg to move amendment No. 57, in page 240, line 12, leave out from "must" to end of line 13 and insert—
'form part of the ordinary share capital of—'.

Mr. Deputy Speaker (Sir Alan Haselhurst): With this it will be convenient to discuss the following: Government amendments Nos. 10 and 11.
Amendment No. 135, in page 248, line 28, at end insert—
'Where an employer pays on behalf of an employee any Class 1 national insurance contributions which would have been due from the employee but for the deduction of partnership share money not be an emolument or benefit chargeable to tax under Schedule E.'.
Government amendments Nos. 12 and 13.

Mr. Timms: The amendments deal with the new employee share ownership plan whose rules are set out in schedule 8. Paragraph 60 provides a rule for the type of share that must be used in the plan. As it stands, the paragraph restricts that to the share capital of a single company.
The legislation for the new plan inadvertently changes the position for consortium companies. Currently, it would not be possible for shares in more than one consortium company to be used at the same time for the purposes of the new plan. It was not our intention to change the position for such companies; we want the new plan to be open to as many companies and employees as possible. Amendment No. 57 ensures that, in the new plan, shares in consortium companies can be used in exactly the same way as under the existing Inland Revenue-approved schemes. I hope the House will welcome that change.
I deal now with amendments Nos. 10 to 13. The new plan is designed to give employees a genuine stake in the company for which they work. Under Inland Revenue-approved share schemes, redeemable shares do not normally count as qualifying shares because they do not entail a full-blown stake in the company—employees can get their money back whenever they want to do so.
Members of retail co-operatives hold redeemable shares, as do those in workers' co-ops. Shares in retail co-ops are bought at their face value. They carry a small amount of interest, providing a dividend based on the company's profit that varies according to the amount of purchases made by the member—often known as a divvy. The shares are also normally redeemable by the company at the same value.
Retail co-ops want to improve their employees' participation in their business. They want to use the redeemable shares that they issue to other members in an


all-employee share plan. Without an amendment to the legislation, such shares would not qualify for the new plan. The amendments extend the current exception whereby workers' co-ops may use redeemable share capital in a new plan to all co-ops that are registered industrial and provident societies.
The Co-operative Union estimates that at present very few employees are members in this way—perhaps as few as 2 per cent. of the 40,000 employees in the 37 United Kingdom consumer co-ops. These changes will enable retail co-ops to encourage their employees to take a stake in the business, using the same redeemable share capital available to other members. Many more employees working in co-ops will be able to benefit from the tax reliefs in the plan. That will help us to achieve our goal of doubling the number of companies that offer shares to all their employees, and it will extend to co-operatives the substantial advantages that the new scheme offers.
Several right hon. and hon. Members have advocated an amendment along these lines. It has been welcomed as a real boost by the chair of the Co-operative Union, and I am delighted to commend it to the House. If I may, Mr. Deputy Speaker, I will seek in a few moments to catch your eye to respond to what is said by Conservative Members on their amendment.

Mr. Howard Flight: We agree with the amendments as outlined by the Minister. I do not know whether this is the right time to mention this, but the issue of consortiums and different shareholdings of companies that are not owned by one single company owning more than 51 per cent. also came up in Committee in relation to investment management incentives. We had a letter of undertaking that the Government would be tabling a relevant amendment. I am not clear whether amendment No. 57 is intended to relate to enterprise management incentives as well as to the employee share ownership plans. However, perhaps we can deal with that point later.
Amendment No. 135 raises, in a slightly different way, a point that we sought to have addressed in Committee. It would cure an anomaly. Under the employee share ownership plan, lower-paid employees could, by having partnership share money paid before tax, have lower earnings in terms of their national insurance contribution liabilities, and thus pay lower personal NIC contributions, in turn receiving lower reduced earnings-related state benefits. That cannot be the Government's intention, given that the employee share ownership scheme is designed to benefit relatively lower-paid employees in particular. This amendment to cure the anomaly is slightly different from our previous proposal.

Mr. Andrew Love: I welcome the amendments to extend the all-employee share plan to co-operative organisations. Before I say a little about that, I should make a declaration. I am a Labour and Co-operative Member of the House, with a long-term interest in and involvement with the co-operative movement.
In the foreword to the Government's initial consultation document on employee share ownership plans, the Chancellor of the Exchequer stated:
Share ownership offers employees a real stake in their company with shareholders, managers and employees working towards common goals.
I agree with that statement. Research shows that employee share ownership plans, when linked with other means of employee participation, can do a number of things. They have a positive effect on productivity; they link the owners with the workers in the objectives of the successful company; and they make employees more aware of the overall performance of the company.
Today's co-operative movement is interested in reform of its structures which are, in effect, stakeholder models of co-operation. The amendment will assist in achieving that reform by achieving real partnerships between the members who are the owners and their employees. It will enable the employees to participate in the activities of the co-operative by voting at meetings, becoming members of the boards of directors and sharing in the profits of the organisation.
I welcome the Government's move in this respect. It will create a level playing field in the industries in which co-operatives are involved. Why should it be that other retailers can have such plans, but the co-operative movement cannot? These amendments will extend such plans to the co-operative movement and give the work force a more inclusive role. The press release issued by the co-operative movement states:
The Government's recognition that our workers deserve to be included is a real boost to those leading exciting reforms in the co-op movement.
I certainly welcome these amendments; they will help to achieve those reforms in the co-operative movement, and I commend them to the House.

Mr. Timms: I welcome what my hon. Friend the Member for Edmonton (Mr. Love) has said, and I commend his work in the House on behalf of the co-operative movement to promote the interests of co-ops.
The hon. Member for Arundel and South Downs (Mr. Flight) asked about amendment No. 57 and the impact on enterprise management incentives. There is no read-across from that amendment to such incentives. I am not sure to which amendment in Committee he was referring, although a later group of amendments deals with enterprise management incentives.
On amendment No. 135, I understand that the intention of Opposition Members is to ensure that, where the employer pays the employee's national insurance on the amount used to buy partnership shares, that amount would not be chargeable to income tax on the employee, but the underlying assumption is that the employer would be able voluntarily to pay the primary national insurance contributions on the employee's behalf. That is not the case.
Current legislation does not permit the employer to pay class 1 contributions that he is not liable to pay, so the employer would not be able to pay those contributions as is implied in amendment No. 135. Without changing the underlying law, which would be a task of significant


technical complexity, that amendment would have no effect so I hope that Opposition Members will not press it to a Division.

Amendment agreed to.

Amendments made: No. 10, in page 240, line 34, leave out "workers'".

No. 11, in page 240, line 35, at end insert—
'( ) In sub-paragraph (4) "co-operative" means a registered industrial and provident society which is a co-operative society.
For this purpose
registered industrial and provident society" means a society registered or deemed to be registered under the Industrial and Provident Societies Act 1965 or the Industrial and Provident Societies Act (Northern Ireland) 1969; and
co-operative society" has the same meaning as in section I of the 1965 Act or, as the case may be, the 1969 Act.'.

No. 12, in page 264, line 36, leave out paragraph 128.

No. 13, in page 267, leave out line 23.— [Mr. Timms.]

Clause 49

PHASING OUT OF APPROVED PROFIT SHARING SCHEMES

Amendment made: No. 58, in page 34, line 42, leave out "6th April 2002" and insert "1st January 2003".—[Mr. Timms.]

Clause 50

PHASING OUT OF RELIEF FOR PAYMENTS TO TRUSTEES OF PROFIT SHARING SCHEMES

Amendments made: No. 59, in page 35, line 12, leave out "6th April 2002" and insert "1st January 2003".

No. 60, in page 35, line 20, leave out "6th April 2002" and insert "1st January 2003".—[Mr. Timms.]

Clause 56

FURTHER PROVISIONS ABOUT SHARE OPTIONS

Mr. Richard Ottaway: I beg to move amendment No. 131, in page 40, line 19, after "be", insert "multiplied by 2.5 and".
I make no apology for the fact that the amendment would largely negate the impact of imposing national insurance contributions on share option schemes.
I want to talk about entrepreneurial activity. We are well aware of what this Government measure will do. The problem has been rightly identified by all involved. A start-up company that has little capital or that makes little profit, and whose shares may be quoted or are at least tradable, may employ many staff on a contractual basis that includes large share options. On the exercise of those options, the national insurance contributions are levied not only on the employee, but on the employer. That imposes a large capital liability on the employer, which he may not have the funds to meet. The Government recognise the problem and have made a gesture, but in our eyes the proposal merely takes things from very bad to bad.
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I want to talk about entrepreneurial activity largely because that is what the measure will hit. After the election, the Government produced a competition White

Paper that built on the efforts of my right hon. Friend the Member for Henley (Mr. Heseltine) when he was Deputy Prime Minister, and a document on the knowledge-driven economy, of which my right hon. Friend was the driving force until 1997. The Institute for Public Policy and Research produced a report entitled "The Entrepreneurial Society", the launch of which the Prime Minister attended. He supported the teaching of entrepreneurship in schools, which was one of the report's main themes, and I shall return to that point. The Government may talk the talk, but do they walk the walk? [Interruption.] Well, that is important and we want to know.
At first blush, the Government do not do too badly for entrepreneurs. There have been changes to capital gains tax, capital allowances for small and medium-sized enterprises are now 40 per cent. and, for the next three years, allowances for certain information technology equipment will be 100 per cent. for small companies, which will go a long way to help the sort of company that the measure will hit. However, medium-sized companies seem to have dropped out of that relief. Research and development reliefs were discussed upstairs in Committee, and a couple of weeks ago the Government announced a 55 per cent. increase in public expenditure on science.
Although I am prepared to give the Government the credit for that, I do not want to go too far or be too kind and generous. The point is that these measures are finely tuned and focused. They address a particular sector, but what of the colossal burden of corporate taxation and regulation that has been dumped on business overall? It will completely swamp everything that these measures will introduce.
Since 1997, business has had to absorb the cost of union recognition and the additional costs of maternity leave and paternity leave, which have been much publicised. It has also had to absorb the cost of rights to time off, rights for part-time workers, the national minimum wage and the working time directive, so it comes as no surprise that the Institute of Directors has said that the additional regulatory burden is costing business £5 billion a year. However, the Labour party election manifesto said:
We will provide stable economic growth with low inflation—
so far, so good—
and promote dynamic and competitive business and industry at home and abroad.

The Economic Secretary to the Treasury (Miss Melanie Johnson): And we have.

Mr. Ottaway: I disagree. for the reasons that I am setting out, the effort to promote dynamic and competitive business is being stifled by measures such as those we are debating. If the hon. Lady talks to industry and business, she will find that they agree.
There is extra taxation on business—the pension fund liabilities, for example. It is dawning on millions of people around the country that there has been a raid on their pensions that will cost them and their employers substantial sums. The Government have introduced the windfall tax on the utilities, corporation tax changes and the climate change levy, which we have discussed. The infamous IR35, which is having a colossal impact on the IT sector and the way it behaves, is not stimulating


business in the way that the Government claimed in their manifesto. Stamp duty, which was debated in the House yesterday and upstairs in Committee, hits business particularly hard. It took heavy pressure from the Opposition for the Government to amend their double taxation relief proposals. The proposals that they originally came up with were outrageous. Thanks to the Conservative party, which is business's friend, the Government have largely climbed down on the measure, but why they should dream of introducing it in the first place is beyond me.
We have had the additional fuel duty, which is having a big impact on industry that relies heavily on transport. We have the aggregates tax and also the national insurance contributions on share options. It comes as no surprise that Sir Clive Thompson, chairman of the Confederation of British Industry, drew attention to Labour's stealth taxes just before the March 2000 Budget. He said:
The Government has introduced a series of well-camouflaged taxes which has put the tax burden firmly onto business. Changes by the Chancellor since 1997 will push up business taxation by almost £5 billion a year for the first five years of the Labour Government.
Given that sort of reaction, and if that volume of taxation is going on business, why on earth do the Government bring in such a measure, which will stifle entrepreneurial actively, not help it?
Ministers must get out there and talk to the people who are at the coal face, who have a wage bill to meet every week and who are up against the heavy burden of corporate taxation and regulation, and listen to them. They would then think twice about putting such a burden on Britain's entrepreneurs.
What sort of message does the proposal send to entrepreneurs in this country? There is no doubt that entrepreneurial activity has an impact on the economy. If we have more entrepreneurs, it tends to generate more economic activity and the economy grows. Whatever side of the political debate we are on, we all want the economy to grow.
In the United Kingdom, we are not doing badly with entrepreneurial activity—at least until we compare ourselves with other countries. Just 3.3 per cent. of the people of this country are trying to start a business, but in the United States it is twice that number—more than 6.5 per cent. of people are engaged in entrepreneurial activity. Only 16 per cent. of entrepreneurs in this country think that there are good opportunities that are worth having, whereas in the United States it is 57 per cent., so why do we have those big gaps? What is going on? What lessons can be learned about entrepreneurial activity?

Mr. John Bercow: Before we accept clause 56, which my hon. Friend wisely seeks to amend, would it not have been helpful if members of the Treasury Bench had spoken to the director general of the British Chambers of Commerce, Mr. Chris Humphries, who said as recently as 20 January this year that, despite their rhetoric, the reality is that the Government have dramatically increased the regulatory burdens that threaten small business competitiveness?

Mr. Ottaway: My hon. Friend makes his point very well. That is the thrust of the argument. That theme was

taken up by the Institute of Directors, whose assessment was that regulatory burdens on business amounted to about £5 billion per annum.
I was talking about entrepreneurial activity in this country. When the Prime Minister attended the launch of the report published last year by the IPPR, he said that entrepreneurship should be taught in schools—no doubt the message went out to the relevant Ministers. It is worth looking at a written answer from the Secretary of State for Education and Employment. It spoke about the introduction of consumer and education entrepreneurial skills in the national curriculum and went on:

At Key Stage I, children will be taught that money comes from different sources and can be used for different purposes.
At Key Stage 2, they will be taught to look after their money and realise that future wants and needs may be met through saving.
At Key Stage 3, they will be taught what influences how we spend or save money, and how to become competent at managing personal money.—[Official Report, 24 January 2000; Vol. 343, c. 25W.]
At key stage 4, there will be more lessons in managing personal money.
That shows that the Government's vision of entrepreneurial lessons and teaching entrepreneurial activity in schools involves telling children how to handle their own money. That is off-beat, and it is not the answer. It will not promote entrepreneurial activity or change the culture. The Prime Minister and the Ministers concerned should revisit the report entitled "The Entrepreneurial Society" and address far more seriously the points that are raised.
To return to national insurance contributions on the exercise of share options, I am grateful for a memo from Mr. Stephen Allott of Micromuse, a software and hardware company in this country, with considerable experience in the United States. In his briefing paper this month he states:
The vast majority of technology start-ups are done in the US rather than Europe for many reasons including customer proximity, supplier and labour base, the tax regime and culture.
He goes on:
New Economy businesses are built on good people not assets. Building a new business from the UK or persuading a multinational to locate a major business unit in the UK means that top talent will have to be happy to locate in the UK.
Mr. Allott continues:
For the UK to be an attractive base for a global technology business (such as Micromuse or the next Cisco) it has to offer something substantial to redress the balance over the United States. The go forward effective personal tax rate of 47 per cent. in the UK compares unfavourably with 26 per cent. in the US for ISO stock options and 46 per cent. for other stock options.
There we have an experienced business man contrasting the United States with the United Kingdom, and demonstrating how unattractive such a comparison is.

Mr. Timms: I am grateful to the hon. Gentleman. Will he confirm the last figure that he gave to the House? Did he say that there was an effective rate of taxation of 47 per cent. in the UK on unauthorised options and that in the United States it is 46 per cent?

Mr. Ottaway: I said that in the United States for ISO stock options, which are considered important, the rate is 26 per cent., and that for other stock options, it is 46 per cent.

Mr. Timms: We are, of course, speaking about unauthorised share options, so let us compare like with
like. The comparison is, as the hon. Gentleman rightly said, 47 per cent. in the UK and 46 per cent. in the US. The arrangements for authorised options are different in both countries.

Mr. Ottaway: The Minister is more familiar with the matter than I am. However, ISO stock options are considered important by companies such as the one that I mentioned, and they attract a tax rate of 26 per cent. That must be taken into account.

Mr. Edward Davey: I am grateful to the hon. Gentleman for giving way. Although the Financial Secretary is right with respect to the measure under discussion, is the hon. Gentleman aware that the Financial Secretary admitted in the Standing Committee on 29 June:
There is an alternative regime for approved options in the US, as there is in the UK
and that
the terms of the approved scheme are more generous in the US than in the UK—[Official Report, Standing Committee H, 29 June 2000; c. 1033.]?

Mr. Ottaway: The hon. Gentleman makes a good point, and the Minister must take account of the weight of opinion. He may receive advice about ISOs before the debate is wound up, just as I may pin down the specific facts.
I quoted a business man who finds it far more attractive to build up his company in the United States than in the UK. A message must be sent from the Government to entrepreneurs.
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I shall conclude by referring to a report from the "Global Entrepreneurship Monitor" produced by the London business school, with which I suspect the Minister is familiar. It is sponsored by Apex Partners and Co., which I suspect has given advice to the Government on entrepreneurial activity. The report was produced in 1999, and includes a clear and specific recommendation in terms of assessing Government policies. It states:
Rules on share option schemes need to be improved to give incentives to people to join young entrepreneurial businesses and go on to build large, world-class enterprises.
If someone is prepared to take a risk with his career and a risk in establishing a business, what message are the Government sending out? It is one that is hostile to entrepreneurs. The Prime Minister has made it clear that entrepreneurship should be encouraged. The Government's advisers have recommended change yet I suspect that the Government will persist in pressing on with activity that is hostile to entrepreneurship instead of encouragement.

Mr. Edward Davey: When, two years ago, the Government introduced measures to apply employers' national insurance contributions to share options and gains on those options, I do not think that they realised the mess into which they were getting themselves. In the Child Support, Pensions and Social Security Bill and in the Finance Bill in clause 56, they have tried to alleviate the problems that they have created. However, they have not

gone far enough. The amendment would help to improve the relief but it would go significantly against the Government's intentions.
When we debated these matters in Committee, the Minister admitted that a real problem had been caused by the Government's previous legislation. He admitted that the problems would lead to some high-tech companies having to assess the unpredictable future liability of employees' national insurance contributions.

Mr. Michael Fabricant: Is the hon. Gentleman aware that many high-tech companies—some of the dot.com companies—are offering profit-share schemes that are related to profits rather than dividends? They are not providing shares for some of their employees even though they are offering bona fide profit options. Is the hon. Gentleman aware also that that is excluded in clause 56, which the amendment is designed to amend?

Mr. Davey: I was aware of that, but I am not sure whether it is germane to my argument or to the issues on which we should focus during the debate. I shall develop my argument, which I hope is germane to the issues.
A problem is created for high-tech companies when it comes to predicting liability and having to account for that. The Minister was up front and honest with the Committee in explaining that problem. High-tech companies often have to go to capital markets to secure extra funds to compete in a highly competitive and dynamic industry, and they have to convince investors that their balance sheets are at least moving in the right direction even when profit and loss does not look too good in the near future. Unpredictable liabilities on balance sheets create great problems in winning the confidence of investors. The Government admitted that that was the problem and they are seeking to deal with it in clause 56.
Have the Government dealt with the problem? In the Child Support, Pensions and Social Security Bill, they introduced an unusual technique in British tax law, which was that there could be an election and an agreement between the employer and employee to switch the liability for employers' national insurance contributions to the employee, thus getting round the accounting proposal. However that creates another difficulty, which is that of attracting labour.
The skilled employees in the industry are internationally mobile. If a UK or US company tried to attract them, they would consider the various stock options and salaries on offer and the tax regimes that applied to salaries and stock options.
In Committee, we focused on whether the provision made the tax regime for stock options for employees of high-tech companies in the United Kingdom worse than the regime in the United States. There was a huge debate about that, and it has been reflected in our proceedings today. I do not think that the Government have gone far enough to make sure that the UK remains attractive enough to internationally mobile labour. The provision will deter skilled employees from joining UK companies instead of those in the United States. That will inevitably encourage high-tech companies to set up in the United States and not in the UK
The Financial Secretary might say that the tax differential—between 46 and 47.3 per cent. for approved share option schemes—is rather small. It might seem a


small differential, but the key point is the change. Many companies have set up in the UK or are considering setting up in the UK because they previously viewed the tax regime here as beneficial. They could encourage skilled internationally mobile employees to work for them in the UK, because the tax regime was favourable for share options. However, in a stroke—by applying class 1 national insurance contributions to stock options—the Government have removed that advantage.
One could argue that there was a tax loophole that needed closing, but was it necessary to remove it altogether? Was it not necessary to give some competitive tax advantage to the UK's information technology industry to attract companies and internationally mobile labour here? By not recognising that important fact, the Government are doing down that sector and doing this country a disservice.

Mr. Bercow: I agree with the hon. Gentleman's observation that the fact of the change is significant. However, does he agree that the other significant fact is that a substantial proportion of the companies that will be affected are small companies? Given that 99.6 per cent. of Britain's firms employ fewer than 100 people and that they account for about 50 per cent. of the private sector work force and generate 40 per cent. of national output, that point is of the most dramatic significance.

Mr. Davey: As always, the hon. Gentleman comes to the House with a barrage of statistics, the veracity of which I cannot confirm at this time. However, I am more than happy to agree with the thrust of his point. Small firms are active in this sector.
When we debated this issue in Committee, I put some of these points to the Financial Secretary. He said that the Government had chosen to get the marginal rate of the relief in clause 56 down to 47.3 per cent. because they wanted to get it below 50 per cent. He said that it appeared from the negotiations that had been held with the companies affected that the figure of 50 per cent. was "psychologically significant". I am sure that it is "psychologically significant", but is that the test that we should apply? We want to ensure that this country is the most competitive—even vis-a-vis the United States—in the world. One could argue that we are talking about percentage points, but they are important in such decisions.

Mr. Timms: Can the hon. Gentleman confirm that, in addition to the liability for the employee, employers in the United States also have to pay a 1.5 per cent. Medicare charge? That works in exactly the same way as national insurance liability works in this country, but it is not an issue for companies here. In that respect—indeed, in many others—the UK is in a better competitive position than the United States.

Mr. Davey: I happily admit that. The Financial Secretary made that clear in Committee. However, he should consider the change. The United Kingdom was in a tax-competitive position, which may have approached becoming a loophole and a matter of concern to the Treasury. I accept that it needed to ensure that its finances were not undermined; I imagine that hon. Members from

all parties would accept that. However, admitting that a tax loophole requires tackling is different from deciding to throw away all tax competitiveness and to pick a rate that happens to be the equivalent of a United States rate plus Medicare and so on.
We must ensure that this country is internationally competitive, especially in the IT sector, and that it can attract mobile capital and labour. We are debating a Bill that contains many provisions that will hit the UK economy through mobile labour and capital, for example, IR35, which the hon. Member for Croydon, South (Mr. Ottaway) mentioned in his speech. One or two other provisions have the same effect. The Minister must address the change. Why did not the Government keep some advantage in tax competition for the UK?
The Financial Secretary developed his thinking in Committee when he compared the US and the UK from the point of view of a French company, the director of which he had met at a recent conference. The Financial Secretary said that the French director had considered and rejected the rest of Europe because the UK was the best place in Europe to set up an IT company. The French entrepreneur then compared the UK with the US. According to the Financial Secretary, the overriding factor for the French director was that the US skilled labour market in IT was rather tight and that he believed that there was a greater supply of such people in the UK. The Financial Secretary was trying to say that there were other considerations about location.
That was an interesting argument, which I do not believe that anyone would dispute. However, people locate in one place rather than another for many reasons. We want to make sure that Britain is best for all those reasons, yet the Government have chosen to throw away our tax competition advantage. Perhaps the relief needs to be only slightly greater than that for which clause 56 provides, and perhaps amendment No. 131 would be too generous. However, if the Financial Secretary had granted only a slightly higher level of relief, he would have received plaudits from the industry and been able to defend his proposal more effectively today.
I hold the Financial Secretary in high regard, and I hope that he will take account of the points that I have made. Many people have been pleased with the way in which he has taken seriously the issue that we are considering, listened to the industry and tried to devise an elegant solution. I am not sure whether it is that elegant, and I hope that he will, in all humility, reconsider that solution to ascertain whether it could be rather more generous next year to ensure that this country remains the world centre for doing business.

Mr. Fabricant: The hon. Member for Kingston and Surbiton (Mr. Davey) rightly points out that businesses need to be competitive in the world market and that there should also be some certainty about investment for future expansion. My hon. Friend the Member for Croydon, South (Mr. Ottaway) has already pointed out that the Government have not helped the position of new companies—or, indeed, mature companies—that operate in the UK market. The Institute of Directors has acknowledged that union recognition, maternity and paternity leave and the working time directive have added an extra £5 billion in regulatory burdens on such companies. Furthermore, fuel duty has not helped.
I should like briefly to explore another area, which the Government have neglected, despite promises made before the last general election by the Secretary of State for Health when he was in the shadow Treasury team.
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Amendment No.131 has been designated by Madam Speaker, as is shown on the selection list, as dealing with "Employee share options: tax relief to employees". Employees benefit not just from share options but from profit-related pay to which the Government have not sought to restore tax relief. Dividend is not the only way by which the employee—

Mr. Deputy Speaker: Order. The matter that we are discussing relates to share options only; nothing else.

Mr. Fabricant: I am aware of that, and I know that the Clerk is aware of it, too. Clause 56 deals with tax relief to employees, as designated by Madam Speaker.
Both main Opposition parties have referred to new sunrise businesses; such as dot.com, high-tech companies. For all sorts of reasons, many of those companies are unable to offer share options at an early stage of their existence. Instead, they offer profit-related pay. Similarly, such companies as the John Lewis partnership—which employs 45,000 people—have a bona fide profit-related pay scheme. Before the election, the Prime Minister, having visited the John Lewis store in Oxford street, described John Lewis as an example of a stakeholding company. I simply want to ask the Minister this—

Mr. Deputy Speaker: Order. I am sure that the hon. Gentleman will accept some guidance. It is not a question of the selection of amendments; we are talking about clause 56, to which the amendment relates. The clause clearly deals with provisions for share options.

Mr. Fabricant: Thank you, Mr. Deputy Speaker.
I conclude by saying that I hope that, in future Finance Bills, the Government will decide to honour their promise, made before the election, to extend the provisions of clause 56 not only to share options, but to bona fide profit-related schemes, such as that operated by the John Lewis partnership and many sunrise companies.

Mr. Edward Davey: Is the hon. Gentleman aware that the previous Conservative Government did not propose tax advantages for share options that might apply to people working for John Lewis and, indeed, took away tax relief on profit-related pay?

Mr. Fabricant: I am aware of that. I am aware also that the present Secretary of State for Health said that this would be restored within the first year of a Labour Government. That was yet another Labour lie made before the last general election.

Mr. Timms: The hon. Member for Croydon, South (Mr. Ottaway) was misinformed about a number of his points. He asked whether we had fixed the technical problem. The answer is yes; we have entirely resolved the technical difficulty.
The hon. Gentleman was mistaken about other matters as well. There is a new spirit of enterprise abroad across the UK, fostered precisely by the measures that the Government are taking. Helpfully, he listed a number of them, to which I would add a number of other changes that we have made, such as the cut in capital gains tax. The hon. Member for Kingston and Surbiton (Mr. Davey), who is well informed on this matter, will know that the 10 per cent. rate of capital gains tax after four years is significantly less than the comparable rate in the US. On that front, we have made good progress—which the hon. Gentleman will welcome—in terms of competition in attracting investment relative to the United States.

Mr. John Burnett: Does the Minister regret that the Finance Act 1998 took away the complete exemption for the first £250,000 chargeable gains on retirement?

Mr. Timms: On retirement! We are now on rather different territory. The answer is no.
Let me draw attention to our reductions in corporation tax rates. We have cut both the main and the small business rates, and have introduced a 10p rate. We now have the lowest-ever small business corporation tax rates, and the lowest in the industrialised world. Since 1997, small companies have received an average corporation tax cut of nearly 25 per cent. That is why there are now 100,000 more small companies than there were at the time of the general election.
Those developments were created by the new spirit of enterprise fostered by all the Government's measures. That is why we are making such excellent progress, and that is why there are 1 million more new jobs than there were at the time of the election.

Mr. Fabricant: The Minister has told us how many new companies had been founded since the election, and the figure was impressive. Will he now tell us how many small companies have gone into receivership since the election?

Mr. Timms: There has been a net increase of 100,000 in the number of small enterprises. That is my point: there are significantly more, in total, than there were at the time of the election.
As we have heard, clause 56 gives relief to the employee in respect of the cost of bearing the secondary national insurance liability, either through an agreement allowing the employer to recover the contributions or by means of an election whereby the liability is transferred. The clause allows a deduction from the amount of the share-option gain that will be chargeable to income tax. In effect, it moves to the employee the corporation tax relief that would have been due to the company if it had borne the cost.
As the hon. Member for Kingston and Surbiton pointed out, that means that the total tax and national insurance charge will be, at the most, 47.32 per cent. As the hon. Member for Croydon, South said, 47.32 per cent. is very similar to the rate that would be paid by a United States employee exercising an option when the uncapped US Medicare contributions and state income taxes are included. It is also a lower top rate of tax than that


applying in many other European countries. France, Germany, the Netherlands, Spain and Sweden all have higher top income tax rates.

Mr. Ottaway: I can clarify what was said by the chief executive of Micromuse. He said that companies in the United States with ISO stock options attracted a 26 per cent. tax rate.
The Minister must recognise that there is a difference between the ways of approving schemes here and in the United States. Here, the Government decide whether a scheme can be approved; in the United States, the company decides. The schemes that we are discussing would attract a 20 per cent. rate in the United States.

Mr. Timms: Schemes approved in the United Kingdom will benefit from the lower rate of capital gains tax—10 per cent. after four years. That is significantly lower than the rate in the US.
The rules for approval of schemes in the US are well defined. They specify a limit of $100,000 worth of options that can be provided for under an approved scheme. The ISOs that the hon. Gentleman mentioned are not popular with many US companies, because they do not carry a company tax deduction. The figure in the UK is £30,000 over three years. As I said in Committee—the hon. Member for Kingston and Surbiton mentioned this—that is indeed less generous than the US limit, but it was the previous Government who reduced the UK limit from £100,000 to £30,000 in order to solve some of their "fat cat" problems. I do not think that we should take lessons from the Conservative party on that.

Mr. Flight: I think that the Minister is unintentionally slightly misleading the House in comparing United States and United Kingdom schemes and applying the word "unapproved" to both types of scheme, because the two are not entirely similar. As he rightly said, the United Kingdom-approved scheme has a £30,000 limit and, therefore, can be used only modestly. Many United States businesses use the ISO scheme. The meaning of "approved" and "unapproved" in United States schemes is different from that in United Kingdom schemes.
As the Minister will discover, the bottom line is that the great majority of options issued to management in the United States end up being taxed at 26 per cent., not 46 per cent. In the United Kingdom, the great majority of options will now be taxed at 47.3 per cent., which is 20 per cent. higher than the rate applicable on most options in the United States.

Mr. Timms: The principles are not that dissimilar between the United States and the United Kingdom. Approved schemes in the United States have to comply with USA tax law and USA regulations, just as United Kingdom schemes have to comply with our tax law and regulations. Many of the most successful dot.com start-up companies in the USA use not ISOs, but unapproved arrangements that have various advantages. That is how—depending on the state tax rate—the overall rate of 46 per cent. is arrived at. If the hon. Gentleman is suggesting that the arrangements being provided for in the Bill are significantly less competitive than those applying to many fast-growing United States firms, he is wrong.
We are proposing a package that is already helping to attract business and jobs to the United Kingdom and to help United Kingdom firms compete in the global market. It recognises the importance of share options for employers and employees, particularly in the new economy. It removes barriers to their use in recruiting and retaining employees, and it meets our aims of a fairer tax and national insurance system by ensuring that tax relief is given for the national insurance contributions on share options to whoever bears that cost.
Although I do not want to make too much of it, amendment No. 131 is deficient in various ways. Even if the defects could be resolved, the changes suggested in the amendment would considerably distort the use of share options compared with other forms of remuneration—such as cash bonuses—which would remain fully subject to national insurance, and they would provide an unwelcome opportunity for the re-emergence of widespread national insurance avoidance. It is estimated that, all together, the proposed provision could cost at least £1 billion annually in lost revenue. Therefore, bearing in mind that substantial cost, I urge Opposition Members to think long and hard before pressing the amendment to a vote.
Abolition of the upper earnings cap on employers' national insurance contributions was another step taken by the previous Government. That action led to companies seeking inventive ways of avoiding national insurance on big cash bonuses, particularly in the City. Share options were being used in that way. As I said in Committee, that is one of the reasons why the rules were changed for share options granted after 5 April 1999, to make national insurance payable on the gain made on the option when it was exercised. The change brought the tax and national insurance treatment into alignment and removed scope for such avoidance, which was an important and worthwhile step forward.
The net effect of the proposed change would be to leave the employee paying combined income tax and secondary national insurance at the employee's marginal tax rate on the share option gain. However, although it would do that for higher-rate taxpayers, as it results in a total tax and national insurance contribution charge of 40 per cent, it would not have the same effect on basic-rate taxpayers—who would be left paying income tax at 27.49 per cent, not the 22 per cent. that would apply to their ordinary salary. Therefore, the amendment also discriminates against the low paid.
5.45 pm
The clause is simple and fair. Employing companies will get a corporation tax deduction from their profits if they pay the secondary national insurance contributions as part of the cost of employment and, if the liability is transferred to the employee or if the money is recovered from the employee, there will be no corporation tax deduction. Instead, the employee who bears the cost will get the benefit of an income tax relief for that cost on the same basis as a deduction for the amount paid in calculating the profit chargeable to tax. I urge the House to reject this costly amendment.

Mr. Ottaway: If amendment No. 131 is extremely costly, and I do not believe that it is, the burden of taxation that the Government are taking out of Britain's


entrepreneurs' pockets is a darn sight more than we thought that it was. We will divide the House on the issue and the reasons for that are clear. The Government have to send a message to Britain's entrepreneurs. It is no good whacking on the taxes and just expecting those entrepreneurs to pay up, but at the same time hoping that more people will engage in entrepreneurial activity. All the research that the Government have shows that an entrepreneurial culture is lacking in this country. That comes as no surprise if the Government are intent on penalising Britain's entrepreneurs.
The Financial Secretary says that he has resolved the technical problems, but that means—as I said—that the solution has gone from very bad to bad. That is not a resolution of the problems. He says that he has cut taxes on business. Why then does the CBI talk of an extra £5 billion stealth tax on business? Why does the Institute of Directors say that there is an extra £5 billion a year in regulatory burden? Those are real issues that are hitting Britain's industry today.
The Financial Secretary said that he has now fostered a new spirit of entrepreneurial activity. If he has, it is despite these measures and not because of them. For those reasons, I urge the House to support our amendment.

Question put, That the amendment be made:—

The House divided: Ayes 164, Noes 315.

Division No. 278]
[5.47 pm


AYES


Ainsworth, Peter (E Surrey)
Donaldson, Jeffrey


Allan, Richard
Dorrell, Rt on Stephen


Ancram, Rt Hon Michael
Duncan Smith, Iain


Arbuthnot, Rt Hon James
Evans, Nigel


Baker, Norman
Ewing, Mrs Margaret


Baldry, Tony
Faber, David


Ballard, Jackie
Fabricant, Michael


Beggs, Roy
Fearn, Ronnie


Beith, Rt Hon A J
Flight, Howard


Bell, Martin (Tatton)
Forth Rt Hon Eric


Bercow, John
Foster, Don (Bath)


Body, Sir Richard
Fowler, Rt Hon Sir Norman


Bottomley, Peter (Worthing W)
Fox, Dr Liam


Bottomley, Rt Hon Mrs Virginia
Garnier, Edward


Brand, Dr Peter
George, Andrew (St Ives)


Brazier, Julian
Gibb, Nick


Breed, Colin
Gidley, Sandra


Brooke, Rt Hon Peter
Gill, Christopher


Browning, Mrs Angela
Gillan, Mrs Cheryl


Bruce, Malcolm (Gordon)
Gorman, Mrs Teresa


Burnett, John
Gorrie, Donald


Burns, Simon
Green, Damian


Butterfill, John
Greenway, John


Cable, Dr Vincent
Grieve, Dominic


Campbell, Rt Hon Menzies (NE Fife)
Hague, Rt Hon William



Hamilton, Rt Hon Sir Archie


Cash, William
Hammond, Philip


Chapman, Sir Sydney (Chipping Barnet)
Hancock, Mike



Harris, Dr Evan


Chope, Christopher
Harvey, Nick


Clappison, James
Hawkins, Nick


Clarke, Rt Hon Kenneth (Rushcliffe)
Heathcoat-Amory, Rt Hon David



Hogg, Rt Hon Douglas


Clifton-Brown, Geoffrey
Horam, John


Collins, Tim
Howarth, Gerald (Aldershot)


Cotter, Brian
Hughes, Simon (Southwark N)


Cran, James
Jackson, Robert (Wantage)


Davey, Edward (Kingston)
Jenkin, Bernard


Davies, Quentin (Grantham)
Johnson Smith,


Davis, Rt Hon David (Haltemprice)
Rt Hon Sir Geoffrey


Day, Stephen
Keetch, Paul





Kennedy, Rt Hon Charles (Ross Skye & Inverness W)
Ross, William (E Lond'y)



Rowe, Andrew (Faversham)


Key, Robert
Russell, Bob (Colchester)


King, Rt Hon Tom (Bridgwater)
St Aubyn, Nick


Kirkwood, Archy
Salmond, Alex


Lait, Mrs Jacqui
Sanders, Adrian


Lansley, Andrew
Sayeed, Jonathan


Leigh, Edward
Shepherd, Richard


Letwin, Oliver
Simpson, Keith (Mid-Norfolk)


Lewis, Dr Julian (New Forest E)
Smith, Sir Robert (W Ab'd'ns)


Lidington, David
Spring, Richard


Lilley, Rt Hon Peter
Stanley, Rt Hon Sir John


Livsey, Richard
Steen, Anthony


LIoyd, Rt Hon Sir Peter (Fareham)
Streeter, Gary


Loughton, Tim
Swayne, Desmond


Luff, Peter
Syms, Robert


MacGregor, Rt Hon John
Tapsell, Sir Peter


McIntosh, Miss Anne
Taylor, Ian (Esher & Walton)


MacKay, Rt Hon Andrew
Taylor, John M (Solihull)


Maclean, Rt Hon David
Taylor, Matthew (Truro)


Maclennan, Rt Hon Robert
Taylor, Sir Teddy


McLoughlin, Patrick
Thomas, Simon (Ceredigion)


Madel, Sir David
Tonge, Dr Jenny


Malins, Humfrey
Townend, John


Maples, John
Trend, Michael


Maude, Rt Hon Francis
Trimble, Rt Hon David


Mawhinney, Rt Hon Sir Brian
Tyler, Paul


May Mrs Theresa
Tyrie, Andrew


Michie, Mrs Ray (Argyll & Bute)
Viggers, Peter


Moore, Michael
Waterson, Nigel


Morgan, Alasdair (Galloway)
Webb, Steve


Moss, Malcolm
Welsh, Andrew


Norman, Archie
Whitney, Sir Raymond


Oaten, Mark
Whittingdale, John


O'Brien, Stephen (Eddisbury)
Wilkinson, John


Öpik, Lembit
Willetts, David


Ottaway, Richard
Wilshire, David


Paice, James
Winterton, Mrs Ann (Congleton)


Portillo, Rt Hon Michael
Winterton, Nicholas (Macclesfield)


Prior, David
Yeo, Tim


Randall, John
Young, Rt Hon Sir George


Rendel, David



Robathan, Andrew
Tellers for the Ayes:


Robertson, Laurence
Mr. Peter Atkinson and


Roe, Mrs Marion (Broxbourne)
Mrs. Eleanor Laing.


NOES


Abbott, Ms Diane
Brown, Russell (Dumfries)


Adams, Mrs Irene (Paisley N)
Browne, Desmond


Ainger, Nick
Buck, Ms Karen


Ainsworth, Robert (Cov'try NE)
Burgon, Colin


Alexander, Douglas
Butler, Mrs Christine


Allen, Graham
Byers, Rt Hon Stephen


Anderson, Donald (Swansea E)
Campbell, Mrs Anne (C'bridge)


Anderson, Janet (Rossendale)
Campbell, Ronnie (Blyth V)


Armstrong, Rt Hon Ms Hilary
Campbell-Savours, Dale


Atkins, Charlotte
Cann, Jamie


Austin, John
Caplin, Ivor


Banks, Tony
Casale, Roger


Barnes, Harry
Caton, Martin


Barron, Kevin
Cawsey, Ian


Bayley, Hugh
Chapman, Ben (Wirral S)


Beckett, Rt Hon Mrs Margaret
Chaytor, David


Begg, Miss Anne
Chisholm, Malcolm


Bell, Stuart (Middlesbrough)
Clapham, Michael


Benn, Hilary (Leeds C)
Clark, Rt Hon Dr David (S Shields)


Benn, Rt Hon Tony (Chesterfield)
Clark, Paul (Gillingham)


Benton, Joe
Clarke, Charles (Norwich S)


Berry, Roger
Clarke, Eric (Midlothian)


Best, Harold
Clarke, Rt Hon Tom (Coatbridge)


Blears, Ms Hazel
Clelland, David


Blizzard, Bob
Clwyd, Ann


Bradley, Keith (Withington)
Coaker, Vernon


Bradshaw, Ben
Coffey, Ms Ann


Brinton, Mrs Helen
Cohen, Harry






Coleman, Iain
Howarth, Alan (Newport E)


Colman, Tony
Howarth, George (Knowsley N)


Connarty, Michael
Howells, Dr Kim


Cooper, Yvette
Hoyle, Lindsay


Corston, Jean
Hughes, Ms Beverley (Stretford)


Cox, Tom
Hughes, Kevin (Doncaster N)


Cranston, Ross
Humble, Mrs Joan


Crausby, David
Hurst, Alan


Cryer, Mrs Ann (Keighley)
Hutton, John


Cryer, John (Hornchurch)
Iddon, Dr Brian


Cummings, John
Illsley, Eric


Cunningham, Rt Hon Dr Jack (Copeland)
Jackson, Ms Glenda (Hampstead)



Jackson, Helen (Hillsborough)


Cunningham, Jim (Cov'try S)
Jamieson, David


Curtis-Thomas, Mrs Claire
Jenkins, Brian


Darling, Rt Hon Alistair
Johnson, Miss Melanie (Welwyn Hatfield)


Darvill, Keith



Davey, Valerie (Bristol W)
Jones, Rt Hon Barry (Alyn)


Davies, Rt Hon Denzil (Llanelli)
Jones, Helen (Warrington N)


Davies, Geraint (Croydon C)
Jones, Ms Jenny (Wolverh'ton SW)


Davis, Rt Hon Terry (B'ham Hodge H)
Jones, Jon Owen (Cardiff C)


Dawson, Hilton
Jones, Dr Lynne (Selly Oak)


Dean, Mrs Janet
Jones, Martyn (Clwyd S)


Denham, John
Jowell, Rt Hon Ms Tessa


Dismore, Andrew
Keeble, Ms Sally


Dobbin, Jim
Keen, Alan (Feltham & Heston)


Dobson, Rt Hon Frank
Keen, Ann (Brentford & Isleworth)


Doran, Frank
Kemp, Fraser


Dowd, Jim
Kennedy, Jane (Wavertree)


Dunwoody, Mrs Gwyneth
Khabra, Piara S


Eagle, Angela (Wallasey)
Kilfoyle, Peter


Eagle, Maria (L'pool Garston)
King, Andy (Rugby & Kenilworth)


Edwards, Huw
Ladyman, Dr Stephen


Efford, Clive
Lammy, David


Ellman, Mrs Louise
Lawrence, Mrs Jackie


Ennis, Jeff
Laxton, Bob


Field, Rt Hon Frank
Lepper, David


Fisher, Mark
Leslie, Christopher


Fitzsimons, Mrs Lorna
Levitt, Tom


Flint, Caroline
Lewis, Ivan (Bury S)


Flynn, Paul
Lewis, Terry (Worsley)


Follett, Barbara
Liddell, Rt Hon Mrs Helen


Foster, Michael Jabez (Hastings)
Linton, Martin


Foster, Michael J (Worcester)
Lloyd, Tony (Manchester C)


Fyfe, Maria
Love, Andrew


Galloway, George
McAllion, John


Gardiner, Barry
McAvoy, Thomas


George, Bruce (Walsall S)
McCabe, Steve


Gerrard, Neil
McCartney, Rt Hon Ian (Makerfield)


Gibson, Dr Ian



Gilroy, Mrs Linda
McDonagh, Siobhain


Godsiff, Roger
Macdonald, Calum


Goggins, Paul
McDonnell, John


Golding, Mrs Llin
McFall, John


Griffiths, Jane (Reading E)
McGuire, Mrs Anne


Griffiths, Nigel (Edinburgh S)
McIsaac, Shona


Griffiths, Win (Bridgend)
McKenna, Mrs Rosemary


Grocott, Bruce
Mackinlay, Andrew


Grogan, John
McNamara, Kevin


Gunnell, John
McNulty, Tony


Hamilton, Fabian (Leeds NE)
MacShane, Denis


Hanson, David
Mactaggart, Fiona


Healey, John
McWalter, Tony


Henderson, Doug (Newcastle N)
McWilliam, John


Henderson, Ivan (Harwich)
Mahon, Mrs Alice


Hepburn, Stephen
Marsden, Gordon (Blackpool S)


Heppell, John
Marshall, David (Shettleston)


Hesford, Stephen
Marshall, Jim (Leicester S)


Hewitt, Ms Patricia
Marshall-Andrews, Robert


Hinchliffe, David
Martlew, Eric


Hodge, Ms Margaret
Meale, Alan


Home Robertson, John
Merron, Gillian


Hood, Jimmy
Michael, Rt Hon Alun


Hope, Phil
Michie, Bill (Shef'ld Heeley)


Hopkins, Kelvin
Miller, Andrew





Mitchell, Austin
Smith, Llew (Blaenau Gwent)


Moffatt, Laura
Snape, Peter


Morgan, Ms Julie (Cardiff N)
Soley, Clive


Morley, Elliot
Southworth, Ms Helen


Morris, Rt Hon Ms Estelle (B'ham Yardley)
Spellar, John



Squire, Ms Rachel


Morris, Rt Hon Sir John (Aberavon)
Starkey, Dr Phyllis



Steinberg, Gerry


Mountford, Kali
Stevenson, George


Mudie, George
Stewart, David (Inverness E)


Mullin, Chris
Stewart, Ian (Eccles)


Murphy, Jim (Eastwood)
Stinchcombe, Paul


Naysmith, Dr Doug
Stoate, Dr Howard


Norris, Dan
Strang, Rt Hon Dr Gavin


O'Brien, Bill (Normanton)
Straw, Rt Hon Jack


O'Hara, Eddie
Stringer, Graham


Olner, Bill
Stuart, Ms Gisela


Organ, Mrs Diana
Sutcliffe, Gerry


Osborne, Ms Sandra
Taylor, Rt Hon Mrs Ann (Dewsbury)


Pearson, Ian



Pendry, Tom
Taylor, Ms Dari (Stockton S)


Pickthall, Colin
Taylor, David (NW Leics)


Pollard, Kerry
Temple-Morris, Peter


Pond, Chris
Thomas, Gareth R (Harrow W)


Pope, Greg
Timms, Stephen


Pound, Stephen
Tipping, Paddy


Powell, Sir Raymond
Todd, Mark


Prentice, Ms Bridget (Lewisham E)
Touhig, Don.


Prentice, Gordon (Pendle)
Trickett, Jon


Prescott, Rt Hon John
Truswell, Paul


Primarolo, Dawn
 Turner, Dennis (Wolverh'ton SE)


Prosser, Gwyn
Turner, Dr George (NW Norfolk)


Purchase, Ken
Turner, Neil (Wigan)


Quin, Rt Hon Ms Joyce
Twigg, Derek (Halton)


Quinn, Lawrie
Tynan, Bill


Radice, Rt Hon Giles
Vis, Dr Rudi


Rammell, Bill
Walley, Ms Joan



Ward, Ms Claire


Rapson, Syd Reed, Andrew (Loughborough)
Wareing, Robert N Watts, David


Rogers, Allan
White, Brian


Rooker, Rt Hon Jeff
Whitehead, Dr Alan


Rooney, Terry
Wicks, Malcolm


Ross, Ernie (Dundee W)
Williams, Rt Hon Alan (Swansea W)


Ruane, Chris



Ruddock, Joan
Williams, Alan W (E Carmarthen)


Russell, Ms Christine (Chester)
Williams, Mrs Betty (Conwy)


Ryan, Ms Joan
Wilson, Brian


Salter, Martin
Winnick, David


Sarwar, Mohammad
Winterton, Ms Rosie (Doncaster C)


Savidge, Malcolm
Woodward, Shaun


Sedgemore, Brian
Woolas, Phil


Sheerman, Barry
Worthington, Tony


Shipley, Ms Debra
Wray, James


Simpson, Alan (Nottingham S)
Wright, Anthony D (Gt Yarmouth)


Skinner, Dennis
Wright, Tony (Cannock)


Smith, Angela (Basildon)
Wyatt, Derek


Smith, Miss Geraldine (Morecambe & Lunesdale)




Tellers for the Noes:


Smith, Jacqui (Redditch)
Mr. Mike Hall and


Smith, John (Glamorgan)
Mr. Clive Betts.

Question accordingly negatives.

Clause 58

EDUCATION AND TRAINING

Amendments made: No. 1, in page 42, line 14, leave out "an account-holding" and insert "a fundable".

No. 2, in page 42, line 44, leave out "97" and insert "108" to "109".

No. 3, in page 42, line 46, leave out from beginning to end of line 2 on page 43 and insert—
'(b) regulations under section 1 of the Education and Training (Scotland) Act 2000.'.

No. 4, in page 43, line 3, leave out "an account-holding" and insert "a fundable".

No. 5, in page 43, line 7, leave out "96" and insert "104".

No. 6, in page 43, line 8, at end insert—
'or he is a party to qualifying arrangements.
(6) In subsection (5) above "qualifying arrangements" means arrangements which qualify under—
(a) section 105 or 106 of the Learning and Skills Act 2000, or
(b) section 2 of the Education and Training (Scotland) Act 2000.'.—[Mr. Timms.]

Schedule 13

OCCUPATIONAL AND PERSONAL PENSION SCHEMES

Amendments made: No. 83, in page 293, line 28, after "section",insert—
', and the provisions of section 632B below,'.
No. 84, in page 294, line 10, at end insert—
'Eligibility to make contributions: concurrent membership
632B.—(1) A member who would not, apart from this section, be eligible to make contributions during a year of assessment shall be eligible to make contributions at any time during that year if—
(a) throughout the year he holds an office or employment to which section 645 applies;
(b) the condition in any of subsections (6) to (9) of section 632A is satisfied in his case as respects the year;
(c) he is not, and has not been, a controlling director of a company at any time in the year or in any of the five years of assessment preceding it;
(d) for at least one of the five years of assessment preceding the year, the aggregate of his grossed-up remuneration from each office and each employment held on 5th April in that preceding year does not exceed the remuneration limit for the relevant year; and
(e) the total relevant contributions made in the year do not exceed the earnings threshold for the year.
(2) For the purposes of paragraphs (c) and (d) of subsection (1) above, no account shall be taken of any year of assessment earlier than the year 2000–1.
(3) For the purposes of paragraph (c) of subsection (1) above, a person is a controlling director of a company at any time if at that time—
(a) he is a director, as defined by section 612(1); and
(b) he is within paragraph (b) of section 417(5) in relation to the company.
(4) For the purposes of paragraph (d) of subsection (1) above—
(a) "grossed up", in relation to a person's remuneration from an office or employment, means increased by being multiplied by a figure determined in accordance with an order made by the Treasury (or left unchanged, if that figure is unity);
(b) "remuneration" shall be construed in accordance with an order made by the Treasury;
(c) "the remuneration limit" for any year of assessment is £30,000;
(d) "the relevant year" means the year of assessment first mentioned in subsection (1) above.

The Treasury may by order amend the definition of "the remuneration limit" in paragraph (c) above for any year of assessment by varying the amount there specified.
(5) For the purposes of paragraph (e) of subsection (1) above and the following provisions of this section, "the total relevant contributions", in the case of a year of assessment, means the aggregate amount of the contributions made in the yea—
(a) by the member in question, and
(b) by any employer of his, under arrangements made by the member under the scheme in question, together with the aggregate amounts of such contributions under other approved personal pension arrangements made by that member.
(6) if—
(a) in the case of a member, the total relevant contributions in a year of assessment, apart from this subsection, exceed the earnings threshold for the year, and
(b) but for that, the member would be eligible to make contributions by virtue of subsection (1) above at any time in that year,
the repayment required by subsection (2) of section 632A is repayment of the relevant excess contributions only (so that the condition in subsection (1)(e) above becomes satisfied).
(7) In subsection (6) above "the relevant excess contributions" mean—
(a) to the extent that a contribution is the first which caused the total relevant contributions in the year to exceed the earnings threshold for the year, that contribution; and
(b) all subsequent contributions in the year.
(8) The Treasury may by order make provision requiring any person who claims to be eligible to make contributions by virtue of this section to provide to—
(a) the Board,
(b) an officer of the Board, or
(c) the scheme administrator of the personal pension scheme concerned,
such declarations, certificates or other evidence in support of the claim as may be specified or described, or determined in accordance with, the order.
(9) A person shall only be eligible to make contributions by virtue of this section in a year of assessment if he complies with any requirements imposed by order under subsection (8) above.".'.
No. 85, in page 310, line 24, at end insert—
'except that, in a case falling within subsection (6) of section 632B of the Taxes Act 1988, the contributions required to be repaid shall be determined in accordance with that subsection (and their repayment shall have the like consequence).'.

No. 86, in page 310, line 47, leave out "section 632A" and insert "sections 632A and 632B".—[Mr. Timms.]

Schedule 14

ENTERPRISE MANAGEMENT INCENTIVES

Mr. Flight: I beg to move amendment No. 144, in page 313, line 34, at end add
'Where an option does not qualify by reason of an error in the scheme pursuant to which it has been granted, but would otherwise have been capable of being a qualifying option pursuant to paragraphs 9 to 17 inclusive of this Schedule, then that error may be corrected and be deemed to have been always corrected from the date of grant of the option.'.

Mr. Deputy Speaker: With this it will be convenient to discuss the following: Amendment No. 143, in page 314, line 24, at end add—
'(4) In the event of the requirements of this Schedule being found not to be met in relation to an option, whether upon enquiry by the Inland Revenue or following an appeal, there shall be no right of action in tort or contract either in favour of or against the relevant company or any employer company.'.

Amendment No. 142, in page 316, line 2, leave out from beginning to end of line 3 and insert—
'At any one time there may not be qualifying options in respect of shares in the relevant company over shares with a total value of more than £1,500,000. For the purposes of this paragraph shares shall be valued according to their market value at the time that the option granted over them is granted.'.

Government amendment No. 61.

Amendment No. 141, in page 328, line 21, at end insert—
'(4) Where pursuant to any provision of this Schedule an individual becomes liable to income tax then notwithstanding any other provision of the Taxes Act 1988, the tax due shall be paid in five equal instalments as follow—
(a) the first shall be due and payable when, but for the operation of this sub-paragraph and ignoring the operation of Chapter V of Part V of the Taxes Act 1988 (PAYE), that tax would otherwise have been due and payable ("the first payment date");
(b) the second shall be due and payable on the first anniversary of the first payment date;
(c) the third shall be due and payable on the second anniversary of the first payment date;
(d) the fourth shall be due and payable on the third anniversary of the first payment date; and
(e) the fifth shall be due and payable on the fourth anniversary of the first payment date.'.

Government amendments Nos. 62 and 63.

6 pm

Mr. Flight: At first glance, the enterprise management incentives appear to be extremely generous and attractive schemes to encourage entrepreneurs and key leaders of business. Regrettably, however, as we pointed out in Committee, there are several problems, one of which is that a large number of business areas have been excluded, based on views founded in the past. A larger problem has been raised by several accounting and law firms specialising in the matter: that if the business in which people are granted EMI options succeeds—and therefore the options become worth something—it will almost certainly have disqualified itself by that stage; so, although individuals might enjoy EMI tax advantages for a year or two, they will quickly cease to do so.
Our amendments relate to the issues thus raised, which reveal the proposal as being more spin than reality—perhaps I should call it underspin. What is the estimated tax cost of the scheme? That would provide a reasonable measure of the extent to which the Government expect it to be effective. According to Government calculations, are EMI schemes a major means of fiscal incentivisation, or am I right to fear that they are merely a case of nice presentation with limited practical application? Before addressing our amendments, I should say, in passing, that the Opposition support the Government amendments, which, as the House will agree, are practical measures.
Our amendments are further practical measures that relate to the themes that I have identified. The first issue is the self-certification system, to which amendment No. 144 relates. Business wanted self-certification, which is a good idea, but it might engender some unnecessarily wrong outcomes. Currently, both employee and employer have to take a chance that the option scheme might not qualify; they have to wait to see whether the Revenue agrees with the employer's view that it does qualify. Therefore, the amendment embodies a reasonable suggestion whereby the correction of technical errors should be allowed where it is clear that the company and its arrangements should have been capable of qualifying. There is a difference between a scheme that is clearly outside the key parameters and rules, and one that contains, say, a drafting error that has resulted in the Revenue not granting its approval. Past comparable arrangements provide precedents whereby the Revenue is permitted retrospectively to correct what are described as remediable errors, as opposed to major errors of principle.
Amendment No. 143 relates to similar territory. Because it is not known at the time of grant whether a scheme will qualify, there is clear scope for legal action if an employee has been led to believe that it will qualify and then finds that it does not. The employer is asked to bear the risk, so we suggest that it should be permissible to give an indemnity against such actions, to avoid the process being impeded by legalese and caveats, which might discourage genuine cases of schemes that should have qualified.
I am referring to our amendments in reverse numerical order, as they appear on the selection list, which means that amendment No. 142 is next. It represents our attempt to create somewhat greater flexibility within the basic parameters whereby no more than £1.5 million can be awarded under EMI options. The amendment would introduce the principle whereby, instead of there being an inflexible maximum of 15 employees, there should be an aggregate limit constituting the total sum of all qualifying options. As Ministers will note, our amendment is worded so that one person will be prevented from awarding himself the whole lot. The current provisions might produce unnecessary anomalies, given the contrasting nature of different businesses. If a company needed to recruit 16 key people and a perfectly adequate market allocation was £50,000, it could not do so under the present rules; similarly, if the key number of people required was seven, but in the very competitive, new economy area, where £100,000 as an allocation was on the low side, it would not be permitted. Our amendment would provide a little flexibility within a limit of £1.5 million and would cater for the different needs of businesses.
Amendment No. 141 proposes arrangements that have been used quite successfully in this country in the past, which, in essence, stagger the payment of tax. It relates to the situation in which after an individual has enjoyed EMI terms for the first two years, the company grows and the individual ceases to enjoy the terms. When he or she exercises the options, there will be substantial income tax liability. The amendment would introduce the principle of instalment payments for the income tax that would fall due on the exercise of the EMI option, and it follows the provisions on payment of income tax on share options that prevailed before 6 April 1984, updated to reflect the introduction of self-assessment, which was not then in operation.
The amendment also removes the gain from the operation of pay-as-you-earn, providing for payment in five instalments. The first would be on the normal self-assessment date and the others on successive anniversaries of it. It is necessary to take account of the special nature of EMI companies. If the tax were collected via PAYE, the employer would have 30 days to raise it to avoid an additional tax charge under section 144A of the Taxes Act 1988, which states that if an employer receives benefits that are non-cash but PAYE-able, such is the gain made on the exercise of share options that a second tax charge on the amount of the PAYE due would be levied if the employee had not paid to his employer the amount of tax due within 30 days.
In practice, the amendment will force the employee to sell shares to raise the PAYE. PAYE applies where shares are readily convertible assets, which the Revenue defines and interprets widely, and which catches any listed company, and even unlisted companies in which it is considered likely that the employee might be able to realise cash from the shares, such as businesses that are about to be sold or in which flotation is pending.
Our proposal is designed to stop what would effectively be mandatory sales arising in situations in which a company has been successful and the EMI qualification has ceased. The Government will be advised by the professions that several problems arise in what is in principle an attractive scheme. Companies offering membership of a scheme to key staff will suffer uncertainty as to how long qualification will last, as to approval by the Revenue after the company's self-certification and as to the potential tax liability. Our amendments are designed to address those uncertainties and make the scheme more workable as regards its basic intent, which we support.

Miss Melanie Johnson: I do not intend to speak to the Government amendments as they are technical, correcting unintended double negatives and so forth.
The hon. Member for Arundel and South Downs (Mr. Flight) got a number of things quite wrong in his speech, and I hope to reassure him. He mentioned costs. The anticipated cost is given at page 154 of the Red Book—£45 million for a full year—and we anticipate that 2, 500 companies will take up the incentive in the first three years, which involves about 18,000 employees. That is the basis on which our figures were constructed.
Amendment No. 144 demonstrates a misunderstanding of how enterprise management incentives work. An EMI option is granted as part of a share option scheme, but it is possible that a company may wish to grant EMI options to key employees under the rules of such a scheme. Nothing in the schedule requires that, however, and the schedule does not refer to a scheme as such. In addition to the reference to a scheme in the amendment, the hon. Gentleman spoke about schemes a few moments ago, but the schedule does not require the establishment of a share option scheme with rules to govern the granting and exercise of options.
6.15 pm
One requirement is that a company is carrying on a qualifying trade, but if it was not, it would not be possible to go back in time to suggest that it had been carrying on a qualifying trade at the date when the option was granted.

That being so, we would not want to deem the option as having been a qualifying option from the outset, if the company decided that not carrying on a qualifying trade was an error and changed its trade to correct it. That would set an extreme and unwelcome precedent, and I cannot think that Conservative Members would think that sensible or desirable.
if, however, amendment No. 144 indicates concern that the company will be unfairly penalised if it has accidentally provided incorrect information when notifying the option to the Inland Revenue, I can allay that concern. The schedule already makes provision, at paragraph 3, for errors to be corrected in the notice to the Revenue. The provisions are equivalent to those provided under self-assessment for companies or individuals to correct any mistakes in their return.
The schedule also makes provision for the grant of an option over shares with a market value exceeding the individual limit of £100,000. Paragraph 10 allows any excess to fall outside the EMI provisions without disqualifying the whole of the option. Any error in the option agreement itself would be a matter between the grantor of the option and the employee. If they agreed to change the terms of the option, and the change related to something not required by the schedule, that would not in itself be a reason to disqualify the option, unless the effect were to increase the value of the shares under option. Amendment No. 144, with its reference to correcting errors in a scheme, in fact addresses an issue not relevant to the schedule. For those reasons, it is unwelcome and unnecessary.
Amendment No. 143 would have far-reaching consequences that the hon. Gentleman may not appreciate. It seeks to prohibit claims in tort or contract from being brought by or against any relevant company in the event that an option fails to meet the requirements of schedule 14. It is not clear why anyone would wish to protect companies against civil actions taken against them, or prevent them from bringing such actions, simply because the action was in connection with an option that failed to meet the criteria for EMI. I can see no reason why the employee—or employer—should lose his or her rights under civil law because he or she has become involved in the grant of an option intended to qualify under EMI.
If, for example, a company had deliberately misrepresented an option to an employee as qualifying for EMI, that employee might well feel that he or she had a legitimate right to challenge the actions of the company in court. That could lead to an anomalous situation. An employer may grant two identical options to two employees—one notified to the Revenue under EMI and the other not. It might be that neither would meet the EMI conditions, but once it was discovered that the first option did not meet the EMI criteria, the employee would have no redress against his employer for any failure to meet his contractual obligations, or any negligence or deceit involved in granting the option. The other employee—with exactly the same right to acquire shares—would retain his rights under civil law. The amendment would give too many powers away as well as raising questions under the European convention on human rights.
Amendment No. 142—it was dealt with as amendment No. 194 in Committee—would allow a company to grant options under the EMI provisions to as many employees as it wished, up to a limit of £1.5 million. The amendment goes against the whole aim of EMI, and against all the


recommendations made to us by business experts. As I have already explained in Committee, EMIs are a targeted measure for key employees—those who really make a difference to smaller, high-risk companies.
In Committee, I provided details of the reports backing EMI which appear at column 515 of Committee proceedings on 6 June. I could list them again, but I did list them all then. A report by the Bank of England on financing technology-based firms, a report by the Confederation of British Industry on technology stars, and the Government's own study group, chaired by Sir Peter Williams, chairman of Oxford Instruments plc, all found that the main barrier to growth experienced by smaller high-risk start-up businesses was a lack of highly qualified and motivated key employees. Those studies recommended targeted tax relief to help solve that specific problem, not general relief for employees to pay less tax.
EMI is the response to that and provides targeted tax relief. If companies want to, they can grant options to all their employees under not one, but two tax-advantaged share schemes: the company share option plan and the save-as-you-earn savings-related share scheme. A third such scheme is not necessary, as the matter is not about companies being to able to grant those options to all employees.
Amendment No. 142 would produce another unsatisfactory result. EMIs are simple and quick to operate, and do not require an approvals process. They have been designed that way because smaller companies have told us they want an incentive that is simple to operate and flexible, so that it can be designed to suit the individual needs of a particular business situation. If EMIs could be extended to all employees, having a company limit of £1.5 million rather than a limit of £100,000 per individual would require much more administration or red tape. I am sorry that the hon. Member for Buckingham (Mr. Bercow) is no longer in his place, as he was complaining earlier about red tape. The amendment would increase the amount of red tape and would involve keeping track of all option grants and exercises to ensure that the limit was not breached and all the employees' tax relief lost as a result.
The hon. Member for Arundel and South Downs asked about disqualification. He claimed that the options will almost certainly have disqualified themselves by the time that the company is successful. There is no disqualification if the company grows above the initial limit of £1.5 million of gross assets. The test applies only at the time that the options are being granted, so the issue foreseen by the hon. Gentleman does not arise. During our extensive consultation, everybody, including an advisory group of experts that helped the Inland Revenue to draw up the legislation, commented that smaller companies have only a limited number of key employees and welcomed the increases that we made to the number, initially from six to 10, and then from 10 to 15. There has also been a welcome for the great flexibility of this incentive.
Amendment No. 141 addresses issues which, again, are based on a misunderstanding. For the most part, no one will pay any tax as the result of being granted EMI options. Under normal circumstances, people will not pay tax when they exercise the option, if they were granted the option at market value. EMI is a very flexible

instrument and allows companies to structure option agreements that could provide a gain to employees for reasons other than the intrinsic growth of the company. For example, companies can offer employees an option at a discount or at no cost at all, or can offer them an option that is immediately exercisable. Normally, there is no charge to tax under EMI on the exercise of a market value option. But when the option is granted at a discount, the normal taxing provisions apply to the part of the gain that relates to the discount. Only the discounted element will then be taxed. The charge arises under the normal charging provisions on share option gains, including section 135 of the Taxes Act 1988. EMI option holders are treated in exactly the same way as any other taxpayer in relation to the chargeable amount.
EMI has been deliberately designed to target the relief on gains arising from genuine growth in the value of the company. That rewards the employee's contribution to making the company grow, rather than any gains that he may make because he has been granted options at a discount on the market price. If a discountable amount is taxed, we would defend that as being not part of the incentivisation, as it has been granted as part of the arrangement, as opposed to growth. In all other regards, under normal conditions, people are unlikely to pay tax. Therefore the proposal envisaged in the amendment is not necessary.
I cannot see a case for providing for EMI option holders a special rule for paying tax over five years on taxable gains which do not fall within the schedule's targeted tax reliefs. In fact, we agree that the revived rules seem to fall in with the rules that the previous Conservative Administration looked at and which they acted against in the Finance Act 1984, when they restricted any payment in instalments to options granted before 6 April of that year. We agree with the previous Government's conclusions that the advantages available to companies under the approved schemes mean that there is no need for special rules for paying tax on other gains. Any taxable gains arising from EMI options are in exactly the same position as gains from other unapproved options, and should be taxed after allowing for EMI relief under the same rules.
The problems envisaged by the hon. Member for Arundel and South Downs will not normally arise and, when they do, that does not present a difficulty, but an arrangement that fits in with other arrangements that we would defend. I hope that I have reassured the hon. Gentleman on a number of counts. On those counts on which I am not reassuring, but arguing that his proposals are unnecessary, unhelpful or complex, I ask him not to press his amendments.

Mr. Flight: I thank the Minister for her full response to the matters that I have raised. I make the point upfront that the issues that I raised have been raised with me by Cisco, which is now called the Quoted Company Association, as well as several leading lawyers in the matter. For better or worse, they communicated to me that their key worry on EMI legislation as it stands is the lack of certainty. They will find what the Minister said helpful in addressing that worry.
Without misdescribing the matter as a scheme, however, when an individual gets his EMI qualifying options, there is an issue arising from self-certification. It is possible that the company may have made a minor


mistake, which the Revenue will pick up when it looks at it a year later and say, "Terribly sorry, there is something wrong." Consequently, the individual will not qualify. There is clearly an issue of materiality versus non-materiality. The Minister may be able to give me further comfort, as it is not entirely clear whether a relatively minor issue can be put right retrospectively.

Miss Johnson: I have already covered that point. As with self-assessment returns, there will be a period when the Inland Revenue or those on the other side can correct any matters. It is perfectly possible for genuine minor mistakes to be sorted out in that period.

Mr. Flight: I thank the Minister for her clear and extremely helpful explanation. I agree that, if that is the case, the risk of EMI agreements getting cluttered with all sorts of legalese to protect businesses against the risk of being sued is probably not a major one. Therefore, amendment No. 143, which sought to address that risk in a rather heavy-handed fashion, is not necessary.
As the Minister said, the tight rules about 16 people and a limit of £1.5 million were discussed in Committee. Our amendment certainly is not intended to undermine the scheme's objective. The simple point is that how many key executives one needs in a business varies enormously, depending on the nature of the business. If the business is very much a selling business, there will be more key people, especially in the flat structure of companies, who will be the makers of success in that business. If the business is a concentrated high-tech producer and the selling is subcontracted, there will be infinitely fewer key employees.
The tariff of key people in different areas and different businesses varies considerably. As we said in Committee, we think that it is sensible to permit flexibility. We are glad that the Government have raised the number to 15, but in some areas there may be eight key people and the tariff may be £200,000, and in other areas there may be 20 key people and the tariff will be much less. I understand why the Government want to stick with the simplicity of the rule—that has its logic—but in consultation with companies, as opposed to venture capital professionals, they would find that there is unhappiness about this issue.
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I shall repeat our point about instalment payments to get it on the record. When an individual gets his grant of EMI options and the company qualifies, can he be sure that he will retain EMI tax status as long as he holds those options, even though the company may subsequently cease to qualify because of significant growth or for another reason? If the EMI status can change relatively easily beyond the date of grant, and the individual who has EMI options is not certain of retaining his EMI tax advantages, my basic concerns stand.

Miss Johnson: I repeat my earlier point, which answered the hon. Gentleman's question. There is no disqualification if a company grows above the initial limit of £15 million of gross assets. The tax-exempt status applies only at the date on which the option is granted. Obviously, it has to apply at that point so that the options can be granted under the EMI incentive. Subsequent growth by the company will not invalidate the fact that the options were granted at that point.

Mr. Flight: I thank the Minister for that reply. The key issue is growth and success, but one could think of other factors that could invalidate the status. On the other hand, there is a question of principle: if there is qualification at the time of grant, does that make the EMI status valid for so long as the individual holds the options? If so, we do not take issue with the proposal. I shall give an example: the Minister, later in her career, will get her EMI options, but she cannot know whether anything will happen to her business or the way in which it conducts itself that will render her options non-EMI, and that will affect her perspective of their value when she receives them.
My understanding, and that of the lawyers to whom I have spoken, is that one's EMI tax status is not safe on all counts simply because the status applies at the time of grant. There are factors that could subsequently negate that status. The Minister kindly responded to my question about growth, but what about other issues?

Miss Johnson: I understand that change would not normally alter that status, but I am happy to write to the hon. Gentleman to cover any other eventualities. I cannot, at the moment, foresee any, but there may be some. Under normal circumstances, the individual who receives the tax advantage will continue to receive it through the EMI incentive. In the case of a disqualifying event other than company growth, the employee has 40 days to exercise and keep the relief; otherwise, the answer is yes: the individual will continue to receive the tax advantage through the EMI incentive.

Mr. Flight: We do not intend to press the amendment to a vote. There has been a useful airing of the issues. I look forward to further modest correspondence on the subject. It is clearly in the country's interests that the measures succeed in their objective. I merely say to the Minister that companies have expressed concerns to me and if the scheme is to work, they must be laid to rest. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 61, in page 321, line 8, leave out—
'at some time in the qualification period relating to the relevant shares'.

No. 62, in page 332, line 10, leave out "not".

No. 63, in page 332, line 36, at end insert—
'This is subject to sub-paragraph (3).
(3) Paragraphs 44 to 46 and sub-paragraph (2) of this paragraph do not apply if the amount chargeable under section 135 of the Taxes Act 1988 on the exercise of the option would, in the absence of those provisions, be less than the amount so chargeable by virtue of those provisions.'.—[Miss Melanie Johnson.]

Clause 66

TAPER RELIEF: TAPER FOR BUSINESS ASSETS

Mr. Flight: I beg to move amendment No. 136, in page 47, line 10, at end insert—
'(2A) Following subsection (7) add—
(7A) Where any individual retires or dies or ceases employment due to ill health, injury or disability, and as a result an asset ceases


to be a business asset, then on a subsequent disposal of that asset taper relief shall be applied as if—
(a) there had been a disposal of a non-business asset which had been acquired for a consideration equal to the market value of the asset at the time it ceased to be a business asset, and which had been acquired two years prior to that time; and
(b) there had been a disposal of a business asset for a consideration equal to the market value of the asset on the date it ceased to be a business asset.".'.

Mr. Deputy Speaker (Mr. Michael J. Martin): With this it will be convenient to discuss the following: Government amendment No. 97.
Amendment No. 137, in clause 67, page 49, line 10, leave out "2000" and insert "1998".
Amendment No. 138, in page 49, line 12, leave out—
'at a time before that date'
and insert—
'in respect of a disposal prior to 6th April 2000'.

Mr. Flight: Government amendment No. 97 concerns the issue to which I referred when we were discussing Government amendment No. 57, but I could not find my notes on Government amendment No. 97. We support the amendment, which addresses what we described as the GKN point. Older, larger companies, in particular, have joint ventures and shareholdings below 51 per cent., which would have disqualified many from the taper relief. The amendment resolves that, and I am sure that the Government will have had discussions with those who raised the issue. We are pleased to support the amendment.
The combination of taper relief, business asset definition and the need to find some method of apportionment will easily result in potential injustice. The unfortunate complications created by those three issues give rise to problems that may be insoluble, and we discussed them at length in Committee. We have considered many formulae, and we may settle on one formula, only to find that we create another injustice.
Amendment No. 136 is designed to deal with one injustice and to produce a slightly fairer result than that produced by the Bill. It tackles the anomaly in the new business taper relief for employees. As soon as they cease to be employees, their assets, which are principally shares, will cease to be business assets and will receive the less favourable taper based on time apportionment. If the employee retires or resigns of his own free will, that is fair enough, but if he is wrongfully dismissed, he should be able to recover damages from the company. That would be fair, although he would have to go through the legal hassle of doing that. I am well aware that the principle on which the Government rest is that in either case the employee has departed and is not contributing to the business.
There is, however, a middle set of no-fault departures, or what in business are now called "good leavers", and it would be unfair to cause those employees to be in a less favourable capital gains tax position because there is no voluntary departure or justifiable ground for divorcing them from the business. For those individuals, our amendment proposes an apportionment of gains on the basis of market value at the relevant time, with an acceleration of the non-business clock post-departure.

If that produces a worse position than time apportionment, we would accept that it is fair because it means that value has increased more significantly after their departure than when they were present, but they were not contributing to that value. We accept that the negative aspect of the amendment is that it adds further complications, but the rough justice of the present arrangements is the worse of the two options.
Our amendments Nos. 137 and 138 address the larger problem. As the House is aware, there are new rules relating to assets acquired in the period between April 1998—when the taper started—and April 2000 when, under the present Finance Act, there was a change to business assets. As the new definition of business assets applies only from 6 April 2000, assets acquired prior to that date, and thus held longer than assets held after that date, are eligible for lower taper relief, if they did not qualify as business assets under the old rules.
We discussed that matter at some length in Committee. As the whole period of ownership is considered for the 10 years prior to disposal, and then divided into periods of business and non-business asset holding, each portion is taxed on different tapers. That seems to be contrary to the Chancellor's policy of encouraging long-term asset holding. As we illustrated in Committee, it produces extremely unfair anomalies in tax bills and would favour people who had acquired their business assets later.
We concluded that the only solution was to backdate the new rules to April 1998 when the taper started, but that confining them to disposals after April 2000—the intention of the measure—would achieve a fairer result. The Government's main opposition to that proposal was its cost. However, I am not sure whether the figures that Ministers quoted would have been confined—as we propose—to disposals made after 2000. I cannot help but comment that, given the splurge announced yesterday, the amount referred to by the Government as the cost was not hugely significant. Our proposal would sort out the extremely unfair and anomalous situations that could arise.

Mr. Burnett: As the hon. Member for Arundel and South Downs (Mr. Flight) has pointed out, we probed this matter extensively in Committee. However, it is worth revisiting.
I speak to amendments Nos. 137 and 138, because they are designed to correct a glaring anomaly that directly contradicts both the Government's principles and the philosophy that underlies their capital gains tax changes—that an individual should be rewarded according to the length of time that he has held an asset. The longer he holds the asset, the less tax he pays.
A simple example of the mischief to which the Bill would give rise is that if an individual, a Mr. Smith, had acquired shares before 6 April this year—now converted by the Bill into business assets, and we welcome that—he would have to wait until about 2010 to receive full CGT relief. However, if a Mrs. Brown acquires the same class of shares in the same company, she will receive full relief in 2004. The continuance of that anomaly is preposterous.
In Committee, I suggested that the problem could be remedied by a simple election by the taxpayer, who could then be deemed to have sold and reacquired the value for no gain, no loss as at 6 April 2000, thus allowing that


individual, on those shares converted into business assets, to have the time running from 6 April this year. That would have given that taxpayer no advantage whatever.
I am sure that the Economic Secretary understands that the intention is not to advantage the person who acquired his asset before 6 April 2000, but to put that person in exactly the same shoes as a person who acquired an asset after 6 April 2000. I do not have exact costs for the amendment, but I do not think that they would be significant. Does the hon. Lady have any information about the costs of those proposals to the Treasury?
The Economic Secretary was good enough to give the matter a fair airing in Committee. I hope that she will have had a chance to think again, and that she can avoid that dramatic anomaly and put all such shareholders in the same position, at little or no cost to the Treasury.

Mr. Edward Davey: Notwithstanding the comments of my hon. Friend the Member for Torridge and West Devon (Mr. Burnett), I thank the Government for tabling amendment No. 97—especially on behalf of my right hon. Friend the Member for Yeovil (Paddy Ashdown).
We raised the matter in Committee—as did Conservative Members. It hits GKN and Westland especially because of the nature of the defence industry and the need for companies to enter joint ventures. I understand that the Government—through their officials—have held detailed discussions with GKN and Westland that, partly, resulted in the amendment. We are grateful to the Government for listening on that point.
Will the Minister confirm that it is the Government's understanding that, in such joint ventures, employees of GKN and of Westland will benefit from taper relief under the amendment? Clearly, that is the Government's intention; that is why they have worked so hard on the provisions. It would be helpful—especially if a Pepper v. Hart challenge were mounted—for the Government to make it clear that it is their intention that employees of GKN and Westland, and similar companies involved in joint ventures, should benefit from taper relief. I am advised that amendment No. 97 would provide for that, but—adopting a belt and braces approach—will the Economic Secretary confirm the point?

Mr. Geraint Davies: I speak briefly on amendments Nos. 136 and 137. There seems to be no indication of the cost impacts of the provisions. Furthermore, they might offer a slightly perverse tax incentive for premature retirement.

Mr. Burnett: That would not be the case. The provisions would operate on a straight line basis. The period during which a person has held an asset is the period for which he receives relief. If the asset was held for four years, full relief would be obtained if the person had acquired it after 6 April and it was a business asset.

Mr. Davies: I am not completely convinced by that point.
Under amendment No. 137, it would not be very beneficial to backdate the more generous taper for business assets, if the idea behind such a taper is that it would produce a positive effect on behaviour. By retrospectively backdating it, the asset holder would

receive a windfall profit without any special benefit in respect of behaviour—because the event would already have taken place. There would thus be a windfall tax loss with no investment benefit.

Mr. Flight: Whether there was a windfall would obviously depend on what happened to the asset. The problem lies in another direction. Let us consider the case of two individuals who work for a company in which they hold shares: one is a loyal employee who first acquired his shares two years ago and the other has only just joined and obtained his shares. During the next eight years, the performance of the shares will be the same, but under the apportionment rules, the longer-serving employee, who bought his shares first, will end up paying more tax than the person who held them for a lesser period.
If the hon. Gentleman reads the debate we held in Committee, where that point was illustrated, he will appreciate the problem. We considered how to address it, and the only way is to backdate business asset relief to April 1998, when the taper started. We can argue whether there may be a windfall gain, but we must work from the point when taper relief started.

Mr. Davies: I accept that there is an issue about fairness in the way in which the provision applies. The difficulty arises once one starts going into retrospective benefits. As we cannot change previous behaviour, there is no benefit in terms of future investment and its duration and depth. It simply means a tax loss. Again, I do not know whether any costings have been done.

Mr. Burnett: In relation to amendments Nos. 137 and 138, if an individual acquired a class of shares in one company before 6 April this year and subsequently acquired shares in the same company of the same class, the recently acquired shares would get full relief in four years, whereas the previously acquired shares would get full relief in 2010. Does the hon. Gentleman not agree that that is glaring anomaly and that it should be corrected?

Mr. Davies: No, I do not agree. Over time, the tax system will change, and different tax regimes may apply. I do not think that the hon. Gentleman makes a compelling argument for the proposals. What is more, as soon as one opens the Pandora's box of retrospective taxation as a precedent, difficulties will arise. It would mean that if a portfolio of assets had been sold under a previous regime, the people affected would immediately want a tax reassessment. That would be a tax man or woman's nightmare and an accountant's dream.
I do not think that the benefits proposed are compelling. The costs have not been thought out and the administrative overheads would be ridiculous. I urge right hon. and hon. Members to resist the amendment.

Miss Melanie Johnson: I thank Conservative Members for their welcome for the change outlined in amendment No. 97. We said that we would bring forward such a measure when we discussed the matter in Committee. Officials have consulted GKN and the Chartered Institute of Taxation in drafting the amendment, and have consulted more widely among other companies.
My understanding is that everyone is content with the amendment. It would be rash for me to say definitely that GKN employees will benefit, but the company is well


aware of the amendment. There has been much communication, both formal and informal. I wrote some days ago to various notable members of the Standing Committee—including, I think, the hon. Member for Kingston and Surbiton (Mr. Davey)—and to right hon. and hon. Members with a local interest who had raised the matter with me. We believe that GKN is content with the amendment. That is as far as I can go in giving the hon. Member for Arundel and South Downs (Mr. Flight) an assurance, but I am sure that he will find it as satisfactory as is possible at this stage.
Of the three Opposition amendments, amendment No. 136 stands on its own, while amendments Nos. 137 and 138 stand together. Amendment No. 136 is unnecessary and unfair, because it would add unwelcome cost and complexity. It would make some people worse off, and is technically defective. I think that the hon. Member for Arundel and South Downs accepted that it would make some people worse off.
With regard to the amendment being unnecessary, where the employee's shares are in an unlisted trading company, or in a listed company in which the employee owns at least 5 per cent. of the voting rights, the assets will continue to be business assets after retirement. Where the assets change their status, as long as the retired employee disposes of them within 10 years of retirement, he or she will obtain some credit for the period for which those assets were business assets under the normal apportionment rules. So the amendment addresses only a small sub-set of cases.
The amendment would add complexity. If it was accepted, there would be two different systems of apportionment. They might apply to the same asset. Right hon. and hon. Members have indicated that one system of apportionment is already too complex. I cannot accept that, but I am nervous about expecting taxpayers to apply two different systems. Adding a bonus two years to the period in which the asset has been a non-business asset seems to be wrong in principle and to add further complexity. The bonus year added in 1998 for assets held at 17 March 1998 was added for quite different reasons.
The amendment would increase taxpayers' resource costs. Taxpayers would need to value the asset at the time of retirement. For listed shares, that is a hassle rather than a cost, but the amendment could also apply to some unlisted shares and securities, and to assets other than shares. Valuations would be needed, and taxpayers would have to bear the cost.
The amendment would make some people worse off. I quite understand that some would be made better off—broadly, those who keep their assets for a long time after retirement and those whose gains are unevenly distributed and arose predominantly when they were employed. However, there would be losers too—people whose gains arise mainly after retirement, people who acquire their shares shortly before they retire and people who sell their shares soon after they retire, for whatever reason.
Let us consider an employee who acquires shares 11 months before retirement and disposes of them one month after retiring. Under the amendment, that employee would receive no taper relief at all. Under the normal rules, he would pay tax on only 88 per cent. of the gain.
Let us consider—I will exaggerate to make the point—an employee whose shares do not increase in value at all in the four years that he or she is an employee, and then double in value in the four years after retirement. It is possible. Under the normal rules, he or she would pay tax on 47.5 per cent. of the gain; under the amendment, he or she would pay tax on 80 per cent. of the gain.
My point is not that the normal method of time apportionment always leads to winners. There are winners and losers under both systems of apportionment. However, it is fairer to have a single system that applies to all apportionment cases across the whole taper system.
The amendment is technically defective. What if the asset later becomes a business asset again? Perhaps the employee returns to work for the company or a listed company becomes unlisted. It is not clear that the amendment would allow a further period of business assets status to accrue.
The amendment does not define its terms. What are "ill health", "injury" and "disability", and who will decide? Is the amendment meant to cover all retirement or just retirement due to ill health, injury of disability?
The interaction of the amendment with the normal market value uplift on someone's death is less than clear. No capital gains tax is payable on that uplift at death. The personal representatives of the deceased pay tax only on gains after the death. Under the amendment, however, they might have to pay tax on gains pre-death as well.
The amendment is similar to one put forward in Committee. It is a better and more worthwhile version, but I still give it only seven out of 10 and do not feel moved to support it.
The purpose of amendments Nos. 137 and 138 is backdating, so that the period between 6 April 1998 and 5 April 2000 is counted as a period of business use. That would produce no increase in productivity or benefit to the economy, as my hon. Friend the Member for Croydon, Central (Mr. Davies) remarked a few moments ago. It would be expensive, which I shall come on to shortly. I will therefore ask the House to reject the amendments if they are pressed.
In clause 67 we are providing a real and positive encouragement to entrepreneurial investment and greater employee share ownership in the future. The amendments seek to reward past activity, where there is no scope for incentivisation.
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It has been suggested that there is something unfair about apportioning gains between the part that is attributable to a time when the conditions for the business asset treatment are satisfied and the part that is not. However, it is perfectly fair and reasonable that an asset that has not been a business asset throughout the relevant period of ownership should be treated less generously than one that has. That is the whole point of the more generous business asset taper. To compare the case of a person who acquired the asset when it was not a business asset, but was later converted to one, with a person who has held the asset throughout as a business asset is to compare apples and pears. We discussed that in Committee at considerable length.

Mr. Burnett: Does the Economic Secretary agree that the Government amendments that convert non-business


assets to business assets are thoroughly worth while and that, if that is so, they would have been worth while two or three years ago?

Miss Johnson: Of course I agree that those changes are worth while, but we cannot incentivise past activities by backdating the measure. That is the crux of the matter, and it is the reason why hon. Members are comparing apples and pears. The apportionment is right in principle because it treats both cases alike by enabling them to receive business asset taper for the time they held the shares as a qualifying business asset. Therefore, I do not agree that the clause is in any way unfair. It is perfectly fair to give business asset taper relief to those who qualify for such relief for the time that they so qualify and not for times that they do not. That is a benefit to all those who hold, and continue to hold, business assets.
It has been argued that the amendment would simplify assessments by ending the need for apportionment. That is true up to a point, but apportionment would still be necessary if assets changed their status for another reason. The complexity of apportionment has been much exaggerated. The Inland Revenue will set out clearly the series of simple steps that taxpayers should follow.
Moreover, such a backdating amendment would be very expensive. There would be a cost of more than £300 million in the next three years. That cost would be all deadweight; it would not act as an incentive and would have no impact on future behaviour. The amendments would direct money away from the new enterprise economy, rather than provide further incentives for growth. Therefore, if the amendment is not withdrawn, I shall urge hon. Members to vote against it.

Mr. Flight: It is not our intention to press the amendment to a Division. The Economic Secretary is aware of the fact that the arrangements contain unfair anomalies and that citizens who are treated unfairly will not be happy. The problem is extremely complicated and the alternative solutions would create other difficulties. We have given the issue an airing, and the Government would be well advised to consider it further, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 67

TAPER RELIEF: ASSETS QUALIFYING AS BUSINESS ASSETS

Amendment made: No. 97, in page 49, line 8, at end insert—
'( ) After paragraph 22 insert—
"Qualifying shareholdings in joint venture companies
23.—(1) This Schedule has effect subject to the following provisions where a company ('the investing company') has a qualifying shareholding in a joint venture company.
(2) For the purposes of this paragraph a company is a 'joint venture company' if, and only if—
(a) it is a trading company or the holding company of a trading group, and
(b) 75% or more of its ordinary share capital (in aggregate) is held by not more than five companies.
For the purposes of paragraph (b) above the shareholdings of members of a group of companies shall be treated as held by a single company.

(3) For the purposes of this paragraph a company has a 'qualifying shareholding' in a joint venture company if—
(a) it holds more than 30% of the ordinary share capital of the joint venture company, or
(b) it is a member of a group of companies, it holds ordinary share capital of the joint venture company and the members of the group between them hold more than 30% of that share capital.
(4) For the purpose of determining whether the investing company is a trading company—
(a) any holding by it of shares in the joint venture company shall be disregarded, and
(b) it shall be treated as carrying on an appropriate proportion—
(i) of the activities of the joint venture company, or
(ii) where the joint venture company is the holding company of a trading group, of the activities of that group.
This sub-paragraph does not apply if the investing company is a holding company.
(5) For the purpose of determining whether the investing company is a holding company—
(a) any holding by it of shares in the joint venture company shall be disregarded, and
(b) it shall be treated as carrying on an appropriate proportion of the activities—
(i) of the joint venture company, or
(ii) where the joint venture company is the holding company is the holding company of a trading group, of that group.
This sub—paragraph does not apply if the joint venture company is a 51 per cent subsidiary of the investing company.
(6) For the purpose of determining whether a group of companies is a trading group—
(a) every holding of shares in the joint venture company by a member of the group having a qualifying shareholding in that company shall be disregarded, and
(b) each member of the group having such a qualifying shareholding shall be treated as carrying on an appropriate proportion of the activities—
(i) of the joint venture company, or
(ii) where the joint venture company is the holding company of a trading group, of that group.
This sub-paragraph does not apply if the joint venture company is a member of the group.
(7) In sub-paragraphs (4)(b), (5)(b) and (6)(b) above 'an appropriate proportion' means a proportion corresponding to the percentage of the ordinary share capital of the joint venture company held by the investing company or, as the case may be, by the group member concerned.
(8) The following shall be treated as having a relevant connection with each other—
(a) the investing company;
(b) the joint venture company;
(c) any company having a relevant connection with the investing company;
(d) any company having a relevant connection with the joint venture company by virtue of being—
(i) a 51 per cent subsidiary of that company, or
(ii) a member of the same commercial association of companies.
(9) The acquisition by the investing company of the qualifying shareholding shall not be treated as a relevant change of activity for the purposes of paragraph 11 above.
(10) For the purposes of this paragraph 'ordinary share capital' has the meaning given by section 832(1) of the Taxes Act.".'.— [Miss Melanie Johnson.]

Schedule 22

TONNAGE TAX

Amendment made: No. 99, in page 432, line 32, at end insert—
'; and
(f) the profits of the overseas company out of which the distribution is paid are subject to a tax on profits (in the country of residence of the company or elsewhere, or partly in that country and partly elsewhere).'.—[Dawn Primarolo.]

Clause 92

TRANSFERS OF VALUE BY TRUSTEES LINKED WITH TRUSTEE BORROWING

Mr. Flight: I beg to move amendment No. 147, in page 66, line 21, leave out "that are" and insert—
'who are not trustees of a settlement for the benefit of the persons named in paragraphs (a) and (b) of section 86 of the Inheritance Tax Act 1984 but who are'.

Mr. Deputy Speaker: With this it will be convenient to discuss the following amendments: No. 148, in clause 93, page 67, line 26, after "(a)", insert—
'"settlement" means any settlement other than for the benefit of the persons named in paragraphs (a) and (b) of section 86 of the Inheritance Tax Act 1984 and'.
No. 149, in clause 94, page 67, line 45, after "13", insert—
'and "settlement"means any settlement not being for the benefit of the persons named in paragraphs (a) and (b) of section 86 of the Inheritance Tax Act 1984.'.
No. 150, in page 68, line 34, leave out "that" and insert—
'which is not engaged in a trade or which does not have a 51 per cent. subsidiary (as that term is defined in section 838 of the Taxes Act 1988) which is engaged in a trade, and which'.
No. 151, in page 68, line 34, at end insert—
'(3) This section shall not apply if the trustees show in writing or otherwise to the satisfaction of the Board of Inland Revenue either
(a) that the purpose of avoiding liability to capital gains tax was not the purpose or one of the purposes for which the trustees became a participator in the close company to which the chargeable gain accrued; or
(b) that the acquisition and the disposal by the close company of the asset on which the chargeable gains accrued were bona fide commercial transactions and were not designed for the purpose of avoiding liability to capital gains tax.
(4) The jurisdiction of the Special Commissioners on any appeal shall include jurisdiction to review any relevant decision taken by the Board in exercise of their functions under subsection (3) above.'.

Mr. Flight: There was a fairly full discussion in Committee of the territory that these amendments cover. A matter of principle is ultimately involved: whether the Government's objective is fundamentally to prevent tax avoidance or to change a principle of British law. It is understood that the purpose of clauses 92 and 93 is to try to stop tax avoidance, but they are widely drafted and apply to all trusts, irrespective of their purpose and operation.
Employee trusts frequently take out a series of loans from employing companies within a group as part of their disposal of shares to employees. The loose wording of schedule 25 could be applied, more or less, to anything to which the Inland Revenue wanted it to apply. Under amendments Nos. 147 and 148, we suggest that employee trusts should be excluded from the scope of the measure, putting beyond doubt that wider employee share ownership should not be hindered inadvertently by such ambiguously worded legislation.
The same point arises in relation to amendment No. 148. Employee trusts could make both gains and losses as they pass to employees shares that have been warehoused for a period. It is possible for them to receive shares from, for example, a retiring controlling director. They could be exposed to higher than necessary capital gains while engaged in perfectly legitimate activity, which the Government wish to encourage.
Similarly, amendment No. 149 is drafted to exclude employee trusts. Why should employee trusts be penalised because they happen to be established for United Kingdom employees where the parent company is located overseas? The Government may say that that is highly unlikely, but business is increasingly global and an employee trust could hold 5 per cent. or more of a company—the minimum threshold to receive a tax bill under clause 94. However, an employee trust would be unlikely to hold more than 5 per cent. of such a company as part of a tax avoidance scheme.
Amendment No. 150 focuses on different territory. The Paymaster General has helpfully confirmed in correspondence that the provisions under clause 94 will apply only to investment gains; it is not intended to apply to gains on tangible assets used in a trade. That relates to section 13 of the Taxation of Chargeable Gains Act 1992, but the defences in that section are not sufficient. Therefore, why have only tangible assets been included? What about software? The principle set out in the Paymaster General's letter could be best safeguarded by making it clear that those provisions will apply only to non-trading groups.
Amendment No. 151 is somewhat larger in scope, so I hope the House will excuse me if I deal with the arguments in total. Those subsidiaries of United Kingdom companies that make gains on the disposals of their assets pay tax in the appropriate location. If the proceeds are used to invest overseas, it is right that no UK capital gains tax arises. UK tax is payable when the proceeds are brought back to the UK or distributed to UK shareholders. Those general rules are overridden only where necessary to prevent avoidance.
The Government say that clause 94 is focused on avoidance, but their definition of avoidance includes any cases in which trustees are shareholders in a close company. Unless, as I have said, the intention is to change an underlying principle of tax law, that definition is too sweeping and unfair. It could significantly reduce the ability of UK-based groups to reinvest overseas and to create continuing flows of income, which would be taxable when brought back to the UK.
We have received a number of representations from taxpayers who are clearly not involved in avoidance and who will be damaged by the new rules. For example, a pension fund may want to invest in property overseas and find that it can take a stake in a non-UK company,


the rest of which is owned by a UK private group. Under clause 94, if such overseas property were sold—that would be outside the control of the pension fund—the pension fund would be deemed to be a tax avoider and a notional gain would be charged even if the proceeds were invested overseas and thus not available.
Another example is a charity with significant assets represented by a gift of shares in a private company. If the status of the private company changed to close—which, by definition, would be outside the charity's control—the charity would have deemed gains visited on it. Thus, it would have a tax liability even when it had no taxable proceeds. A more glaring anomaly is represented by the example of a close company at present controlled by individuals who will be outside the scope of the new rules introduced by clause 94. If those individuals believe unreservedly in the values of employee share ownership, they might create a trust for the permanent benefit of their staff and transfer to it the majority of the shares in the company. Under clause 94, the situation would change totally so that the trustees would be deemed guilty of tax avoidance. Overseas gains would be attributed to them even if they had no money with which to meet the tax. The Baxi Partnership, to which we referred extensively in Committee, is an example of that.
A company that has had investments abroad for 20 or 30 years might decide that the time has come to realise those investments and reinvest the proceeds in either a different asset or another overseas country. Again, there would clearly be no UK tax avoidance motive, but if the company committed the heinous crime of having trustee shareholders, deemed gains would be attributable through to those shareholders if the company was close and the funds available for reinvestment would be reduced.
In Committee, we urged the Government to accept that they had to identify commercial cases, including such examples as I have described, to meet what we understood to be their intention to focus on avoidance situations. Our amendment, which draws on long-standing precedents, offers an acceptable way to achieve that. One of the oldest anti-avoidance provisions in our tax code was originally section 18 of the Finance Act 1936, which became well known through the Vestey case in the 1980s. Even that provision, the severity and breadth of which has been commented on by a number of distinguished judges, provides an exemption when the taxpayer has invested overseas for bona fide commercial reasons or not to avoid UK tax. In the narrow area on which the Government are focusing, we ask that they afford the same protection that extends to that wide income tax avoidance provision.
To sum up, a recent Revenue technical note said:
Certain aspects of the current tax code for capital gains can hinder businesses' international competitive position and distort their commercial decisions, forcing them to adopt structures that they would not have needed otherwise. It may also act as a disincentive to companies that are investing to innovate and to modernise.
We ask the Government to see that justice is done.

The Paymaster General (Dawn Primarolo): I shall respond briefly as we had a similar debate in Committee, and I must admit to a feeling of déjà vu as the hon. Member for Arundel and South Downs (Mr. Right) has

made exactly the same arguments. I remind the House that the proposals represent an important package of measures that we have introduced to counter a large number of tax avoidance schemes involving the use of trusts, which have been devised to enable individuals to sell valuable assets without paying any tax on their gains. Our proposals, which are specific and tightly drawn, deal with avoidance.
7.15 pm
Although this may disappoint the hon. Gentleman, I am no more convinced by his amendment than I was in Committee, even though we have had extensive discussions. Towards the end of his remarks, he referred to three aspects on which there was a meeting of minds in Committee: charities, pension funds and whether the operation of section 13 of the Taxation of Chargeable Gains Act 1992 is harsh. Particular discussion centred on the Baxi company.
Before I respond on those points, which are the ones on which the hon. Gentleman seeks the comfort of a reassurance given on the Floor of the House, I say to him that the proposals deal with avoidance. In Committee, he agreed that he would not want himself or his party to be associated with activities deliberately designed to allow someone not to pay tax. I accept his point about the amendment, but in the knowledge that there is much to agree on with respect to the broad sweep of the proposals. However, I recognise that the Opposition feel strongly as they have returned to these issues yet again.

Mr. Oliver Letwin: For only the third time.

Dawn Primarolo: Third time lucky, perhaps.
As I said in Committee, I have asked the Inland Revenue to review without prejudice the operation of section 13 of the 1992 Act in respect of charities. I have also asked it to consider pension funds, which the hon. Member for Arundel and South Downs also mentioned. I have some sympathy—I would not like to overstate the point—with the view that section 13 may operate harshly in some circumstances, so I have asked the Inland Revenue to extend the remit of the review, again without prejudice, to see whether there is a case for widening the categories of gain not caught by section 13.
May I put out a general statement? People concerned about those matters, including the hon. Gentleman, will have the opportunity to make their points to the Revenue. I take a great deal of pleasure in my correspondence with him, and I am sure that the Revenue will do likewise. I shall consider carefully the points arising from the review and there is no reason why there should not be further correspondence at that time. I trust that my remarks have helped to allay the fears expressed by Conservative Members and that they will withdraw the amendment and await the outcome of the Inland Revenue's considerations.

Mr. Flight: I thank the Minister for a most constructive response. Both of us seek justice and fairness and, with pleasure, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 26

TRANSFER OF VALUE: ATTRIBUTION OF GAINS TO BENEFICIARIES

Amendment made: No. 90, in page 482, line 5, leave out—
', in subsections (1), (3)(a), (4), (5), (7) and (8), after "sections 86A to 96
and insert "—

(a) in subsections (1), (3)(a), (4) and (7), after "sections 86A to 96", and
(b) in subsections (5) and (8), after "sections 86A to 90 [Dawn Primarolo.]

Schedule 30

DOUBLE TAXATION RELIEF

Dawn Primarolo: I beg to move amendment No. 103, in page 513, line 11, at end insert—

'Restriction of relief for underlying tax

7A.—(1) Amend section 799 of the Taxes Act 1988 (computation of underlying tax) as follows.

(2) In subsection (1) (underlying tax to be taken into account to be so much of the foreign tax on the relevant profits as is attributable to the proportion represented by the dividend) after "as" insert "(a)" and at the end of the subsection add ", and
(b) does not exceed the amount calculated by applying the formula set out in subsection (1A) below.

(3) After subsection (1) insert"—
(1A) The formula is—

D x M/(100 - M)

where—
D is the amount of the dividend; and
M is the maximum relievable rate;
and for the purposes of this subsection the maximum relievable rate is the rate of corporation tax in force when the dividend was paid."

(4) In subsection (3) (profits by reference to which underlying tax to be taken into account is calculated)—
(a) at the end of paragraph (a) insert "and";
(b) omit paragraph (b); and
(c) in paragraph (c), for "paid neither for a specified period nor out of specified profits" substitute "not paid for a specified period".

(5) This paragraph has effect in relation to any claim for an allowance by way of credit made on or after 31st March 2001 in respect of a dividend paid by a company resident outside the United Kingdom to a company resident in the United Kingdom unless the dividend was paid before that date.

(6) In determining, for the purpose of any such claim made on or after that date, the underlying tax of any such third, fourth or successive company as is mentioned in section 801(2) or (3) of the Taxes Act 1988, this paragraph shall be deemed to have had effect at the time the dividend paid by that company was paid.'.

Mr. Deputy Speaker: With this it will be convenient to discuss Government amendments Nos. 104 to 107.

Dawn Primarolo: I have not moved the amendment formally because it is necessary to comment on the double taxation relief issues before the House. I recognise that the hon. Member for West Dorset (Mr. Letwin) is not

feeling as well as he might. I therefore hope to be succinct in my comments and, at this point, perhaps he will agree with our proposition.
The amendments will change the system of double taxation relief for companies in order to reinforce the Government's policy of removing the tax advantages that the biggest multinationals get from using offshore companies to route dividends into the United Kingdom. At the moment, that enables them to avoid UK tax on profits on which little or no tax has been paid elsewhere, and to avoid the impact of the legislation on controlled foreign companies—a matter that we will come to subsequently.
Most of the provisions introduced by the amendments are new. Some, however, are a reordering of amendments that were agreed in Standing Committee; they need to be repeated because of the other changes that we are making. I turn specifically to the new proposition in the Government amendments, which basically deals with onshore mixing. That brings me to new sections 806A to 806K. I shall mention briefly what they do.
The Inland Revenue has produced a very detailed explanatory note with dozens of worked examples. To make this aspect of very complex legislation as clear as we possibly could, the Government thought that it would be helpful to have a full explanatory note for business and, indeed, hon. Members to refer to. The Inland Revenue will publish further detailed guidance about the legislation later this year, well in advance of when the legislation starts to apply at the end of March next year.
New sections 806A to 806G allow underlying tax that is excluded by the 30 per cent. mixer cap, or that cannot otherwise be allowed in the UK, nevertheless to qualify for credit relief, subject to an upper maximum limit of 45 per cent. That will effectively prevent low-taxed profits from being mixed with high-taxed profits, while still allowing relief for foreign tax paid at rates of up to half as much again as the UK rate.
A rate of 45 per cent. is generally above the main corporate tax rates in, for example, virtually all the European Union, the United States and a very large number of other countries, which I am more than happy to read into the record if hon. Members wish. However, I do not think that they would wish me to do that, so I will use just those examples.
The proposals would remove the tax advantages of holding overseas subsidiaries through offshore holding companies. They prevent avoidance of UK tax on low-taxed profits from controlled foreign companies by the current practice of mixing them with high-taxed profits earned by different companies in different countries. They stop the UK giving unlimited relief for foreign tax paid at rates well in excess of the UK rate, while nevertheless giving companies scope for obtaining relief for foreign tax paid at rates that are up to half as much again as the UK corporate tax rate. They introduce more flexible forms of relief than UK companies have enjoyed before.
The old system of mixing offshore was extremely complex. Dividends had to be timed perfectly. One had to have the right dividend in the right place at the right time in the right year in the right amount. The mixer system was very complicated and entirely artificial. We are putting in place a system whereby new companies investing overseas will in future have a new system that


is simpler and more flexible, although taxation in this area is never simple; however, it will be simpler. It will influence behaviour.
Some companies already investing overseas have complicated structures. If they want the maximum benefit from the arrangements, they will need to restructure. In the Financial Times today, the Chartered Institute of Taxation said that the compromise was "generous and flexible". Hallelujah! Peter Cussons, partner of PricewaterhouseCoopers, said of the proposals, "90 per cent. there, " although he would have liked to have seen the cap set a little higher, but he would say that, wouldn't he?
I think the House will agree that the arrangements that will be in place following all the changes in the Finance Bill on double taxation relief, on capping and to prevent offshore mixing, and the arrangements for onshore mixing give a sound basis to move forward in this policy area. I commend the amendments to the House.

Mr. Letwin: It seems as long as I have been alive since we started making representations about the matter. Hon. Members present will remember that the initial proposals by the Government followed a consultation paper in which two options were put forward, one of which was onshore pooling. From that moment to this, we have argued that onshore pooling was an appropriate response. I can only say with heartfelt thanks that the Paymaster General and her colleagues have now given us a system of onshore pooling. We could all have been spared a lot of time and bother had that been done in the first instance.
This is very good news for British industry, for parliamentary democracy and for those who are contemplating establishing headquarters of multinational companies in the UK. Indeed, I will go so far as to say that I think the system of onshore pooling is superior in principle to the system of mixer companies, which has informally and quasi-formally operated to date. It is very good news. Indeed, it overwhelms the points that I am about to make, although they are also important. I hope that the Paymaster General will take them in the spirit in which they are intended—not as party politics, but as a recommendation for serious action over the next year.
if I can be forgiven a Dickensian allusion, the drafting of these particular amendments, which I recognise has been done in an almighty rush given the complexity of the subject matter, is worthy of the Circumlocution Office and may on reflection engender a certain amount of Jarndyce v. Jarndyce legal action. I hope that the Paymaster General will allow the next few months to be taken up in part by a review of those provisions to see whether a certain element of the spirit of the tax rewrite might not enter some of them, and whether they might not be brought back, not substantively altered necessarily—except in relation to a point that I shall come to—but altered in the drafting, so that there is some hope of people who have to operate the system in future years roughly understanding them.
Many hours spent going through the provisions in the past few days with expert help have convinced me that it is almost impossible to understand quite large sections. One or two of the most distinguished accountants in Britain are unable to determine the precise meaning of some of the paragraphs. Perhaps the parliamentary counsel who wrote them is unable to determine their meaning. In any case, I am sure that they could be improved upon with the lapse of time.
We are grateful for the offer that the Paymaster General makes to produce a kind of guide for the uninformed in due course. I hope that that guide, which will have the benefit again of a much greater amount of time than the notes on clauses have had, will benefit from a little application of Fowler's plain English—not just plain English, but conceptual clarity.
I do not mean to be abrasive about the people who had the laborious task of drafting the notes on clauses, at what must have been astonishingly high speed. The notes are voluminous, but I must say that they are an extraordinary example of the art form. They make issues that were already complex obscure, and in some cases, issues that were already obscure incomprehensible. In some cases, it was only by returning to the clauses themselves that I could make out what was going on. The problem is remediable. There are plenty of people in the Treasury and at the Paymaster General's disposal who know how to do such things, given a few more weeks. I hope that time will be taken and that when the guide is produced, it will be comprehensible. So far, we are probably ad idem on the matter on both sides of the House.
7.30 pm
I shall deal with one grave matter of substance, but, before that with one comparatively minor matter. First, I must declare an interest. I have never been able to work out what it was, but I am sure that I do have an interest in some way, and it would be remiss of me not to declare it.
The Paymaster General said—and she was right—that the preponderance of the relevant other jurisdictions have tax rates that fall within the 45 per cent. limit. However, the current drafting of the amendments will, rightly, also capture withholding tax. The hon. Lady will discover, or she may already know, that in relation to, for example, subsidiaries held in Tokyo or in the state of New York, the composite effect of underlying tax and withholding tax rates will exceed 45 per cent.—not by very much, but by a little. That is why, I think, Mr. Cussons was arguing for a slightly higher rate. I believe that 48 per cent., for example, would capture almost all the effects to which I am referring, and certainly 50 per cent. would.
I do not want to stress that point unduly. Throughout the debate, I have never sought to use hyperbole where there are serious arguments and serious issues at stake. The old system that was introduced by the previous version of the Bill would have destroyed Britain as a location for multinational headquarters. The difference between 48 and 45 per cent. as a cap on onshore pooling will not destroy—I repeat, will not destroy—Britain as a headquarters for multinationals. It is, however, a minor irritant and I hope that the Paymaster General will reflect on that. There is time enough between now and next March or April to revise the limit to 48 per cent. That would be helpful, without much cost to the Treasury.
My major point relates to a matter which the Paymaster General acknowledged, to a degree, but I am not sure whether she has yet, or even that we have yet, fully grasped the scale of the problem. I refer not to new companies that are considering locating their headquarters in the UK, but to multinational companies that are already headquartered in the UK.
Those multinationals are largely shackled by the provisions that ensure that there will be a significant crystallisation of capital gains, should they seek to leave


the UK. It has never been our argument that any change of double tax relief will send packing companies that are already headquartered in the UK, for that very reason—they are shackled by the provisions of capital gains realisation.
I am not saying that the effects that I am about to describe will send companies packing, but those effects may cost companies currently headquartered in the UK very large sums of money. That is the worry. Currently headquartered in the UK are multinational companies which, for tax-mixing purposes or for other purposes, or both, have been structured around intermediate holding companies, very often Dutch BVs, but in some cases other kinds of mixer companies. They have indirect subsidiaries—subsidiaries of subsidiaries—often in countries such as Japan and the United States.
The great bulk of the most important subsidiaries of multinationals headquartered in the UK, both originally UK-based and immigrants to the UK, have holdings through intermediates and sub-subsidiaries in the US and Canada. For various cultural and business reasons, our major area of outward investment has been north America. Under the provisions for onshore pooling, in order to benefit fully from the mixing or pooling—in order to get the unrelieved portion dealt with and to be able to use it—those companies will have to restructure their activities in such a way as to bring the current sub-subsidiaries and sub-sub-subsidiaries under the direct ownership of a UK-based company. That is the point of onshore pooling. We have no objection to that. There are restructuring costs associated with that. but I do not dwell on them—I suspect that, in the context of those companies, those costs will not be major.
However, the UK is not alone in having rules that crystallise capital gains upon restructuring. Other countries do, too. Some of the jurisdictions in the US have very great penalties on restructuring under certain circumstances. The Paymaster General is helpfully nodding, so the subject has evidently been aired inside the Treasury. I have had the opportunity in the past few days to discuss the matter with some distinguished auditors and also with some of the most important company treasurers in multinationals headquartered in the UK, which have not just substantial but enormous sub-subsidiaries and sub-sub-subsidiaries in north America.
I can assure the Paymaster General that a proper investigation of the matter will in due course reveal that the possible losses to multinationals headquartered in the UK associated with the transitional restructuring, so to speak, required to get the benefit of the onshore pooling may be enormous.
Bizarrely, that takes us back to a slightly sterile debate that we had right at the beginning, long before I at least, and perhaps even Ministers, properly understood what we were debating. That was the sterile debate about how much the Treasury would or would not raise by moving from mixing to no mixing. It was a sterile debate then as, in fact, the Treasury would not raise anything because sooner or later companies would not come to the UK. The long-term effect of the old proposals would have been that no revenue was raised and no multinationals were headquartered in this country.
Now there is the question not of new companies coming, but of existing companies that are shackled in the UK. There is the possibility not of the Treasury doing too well, as it will not gain by the restructuring, but of the US Treasury gaining from the provisions. I know that throughout the proceedings in Committee and on Report, the Paymaster General has been generous and I do not doubt her generous instincts, but I suspect that they do not stretch to trying to make the US Treasury richer at the expense of UK-headquartered multinationals.
A brief inspection of The Economist this week will show that the US Treasury is rich beyond the wildest dreams of man. It is getting to the point where presidential candidates vie with one another to explain to US taxpayers how much tax relief they will undertake. We do not need to shed tears about the US Treasury, and we do not need to make it any richer at the expense of multinationals headquartered in the UK.
The practical question arises: how serious is the problem? The honest answer is that I do not know, and there is no one else who knows, as we have had only a few days to study the amendments. It will take time for accountants and treasurers in those large companies to get to grips with what will be required and to work out in detail what the costs will be.
What are the practical steps that can be taken if it transpires that the problem is serious, as I suspect it may be? I think that I can suggest a course of action that may be acceptable to the Paymaster General and which she would have an opportunity to put on the record today. We could then rest easy, broadly, and, in the spirit of amity, claim joint victory over the forces of evil. I do not suggest in any way that that would be a victory over the Government—no, no, far be it from me.
I suggest that over the next few months, companies be given the opportunity to calculate the tax costs arising in other jurisdictions; that some consultative process be established so that they can bring to the attention of the UK Treasury on a confidential basis the broad effects; and that the Paymaster General and her colleagues should consider those and judge whether the effects are serious. If they are, the Paymaster General or her successor should bring forward in next year's Finance Bill—that will be just in time—transitional amending provisions to provide more time or to make such other changes as are necessary to allow multinational companies currently headquartered here not to suffer the effects that we are discussing, or not to suffer them too dramatically.
I say "just in time" because, as the Paymaster General rightly said, the provisions will come into force next March. Unless my colleagues or successors are peculiarly inadvertent, next year's Finance Bill will not have been taken through the House and passed into law by March.
If the hon. Lady were now to announce that she is at least willing to go through some such process, and to agree that if it transpires that there is modification required she will bring forward in next year's Finance Bill retrospective legislation to allow for that, companies could proceed in the next few months in the knowledge that if they can show that there is a real problem, action will be taken retrospectively to allow them to engage in restructuring at a pace and in a way which minimises that problem.

Mr. Edward Davey: The hon. Gentleman is making an important point. One way to assist companies as they plan


for the next financial year would be if the Government were, in a pre-Budget report, to pre-announce at that early stage their intention to allow retrospective taxation and the possible shape of it.

Mr. Letwin: Yes. I think the hon. Gentleman's suggestion is an improvement on mine. I agree that it would be helpful if these matters were made clear in a pre-Budget report. I am sure that there will be time enough to do that. If there really is a problem, the scale of it will then have become clear.
I do not ask the Paymaster General to make a firm commitment on Report to a particular series of steps. However, if she will agree to reflect on these matters and to work out a scheme of action that will ensure that there are not unnecessary, significant and crippling costs—crippling is perhaps an exaggeration—for multinational companies currently headquartered in the UK, we shall have achieved a reasonable solution. This is a textbook case of why it is worth while going through the rather ghastly and laborious process of Second Reading, Committee and Report—it has given the industry and the professionals time to bring out the real problem.
I give due credit to the Paymaster General because she has shown considerable forbearance and understanding as we have gone through the parliamentary process. In the end, she has produced a sensible and workmanlike solution. She will not go down in history as the sort of Agrippa that we feared. On the contrary, she will be recognised as the kindly aunt of British industry.

Mr. Barry Gardiner: We have come a long way over the past few months, and the amendments reflect that. I pay a sincere tribute to the work of the hon. Member for West Dorset (Mr. Letwin), who, in a powerful speech at the beginning of our consideration of these matters on the Floor of the House, drew attention to the problems that stemmed from the original drafting. He did his cause nothing but good by the way in which he argued rationally and reasonably throughout consideration in Committee, not taking the line of party political advantage. I have been impressed by that, and I pay him tribute for adopting that approach.
I pay tribute also to my hon. Friend the Paymaster General for the way in which she has consistently responded to, and taken on board, the points that have been made. With the amendments, we shall end up with much improved legislation. As the hon. Member for West Dorset said, that is a tribute to the parliamentary process of Second Reading, Committee and Report.
7.45 pm
In Committee, I recall the Paymaster General making some fine points about the way in which changes to double taxation must be considered, together with all the other elements of the tax system. We must take account of that. I say in response to the comments of the hon. Member for West Dorset about US Treasury gain that business has repeatedly pointed out that there is extreme reluctance to take on board aspects of the US taxation system in this country. Relief for interest is restricted, capital gains are taxable and double taxation relief is extremely complicated in the US. On that basis, I do not think that the amendments will he the windfall for the US Treasury that the hon. Gentleman might have led us to believe.
We have ended up with 16 pages of highly complex legislation, and, at short notice, we have had to come to terms with how that will impact on industry. There is still the opportunity for pause for further reflection. When we consider the revised figure of 45 per cent., it seems that companies using overseas holding companies to hold trading companies in higher tax countries are penalised. An example would be if a German subsidiary were held below a holding company. A capped rate of 30 per cent. would apply to double taxation relief. That is the UK corporation tax rate. If the subsidiary company were held directly, the cap is 45 per cent., and can therefore be pooled against more lowly taxed profits. There are areas that need further consideration. There can be commercial reasons for holding companies other than simply tax reasons. These will restrict the ability to mix and pool dividends when shares are held under a holding company.
A UK company using an EU holding company is now worse off than if foreign trading companies were held directly in some situations. I question whether that is in line with the free movement of capital that is demanded within the EU. However, the movement that we have seen over the past few months has been enormous. We have ended up with much better legislation than would have been the result had we proceeded on the basis on which we started. I pay tribute to my hon. Friend the Paymaster General for the work of her team and for her willingness to listen to all the arguments that have been presented to her.

Mr. Letwin: What the hon. Gentleman says is true. However, I hope that I shall not be accused of disloyalty to my right hon. and hon. Friends if I defend the Paymaster General against the hon. Gentleman's accusation. It is an inherent part of the logic of onshore pooling that the holding should be direct for the unrelieved portion to be mixable. It is almost necessary that there should be strict compulsion that all the mixing should be done onshore for the regime to be clear. I accept the hon. Gentleman's point that that will mean that the subsidiaries of trading subsidiaries, rather than controlled foreign companies, will also be caught. I accept also his point about the effects in Germany, for example. However, that is an inherent part of the logic and we must accept that consequence, whereas the restructuring that I was talking about is transient.

Mr. Gardiner: I accept those points. Where we have ended up may have certain consequences that are disadvantageous but, on balance, we have a package that is a huge improvement on the original drafting, and one that should be welcomed by the House.

Mr. Edward Davey: If only, on the odd occasion, Prime Minister's Question Time could be as consensual as this debate. It has been quite amazing. There has been a great deal of agreement between both sides, and that is welcome. I associate myself and the Liberal Democrats with the comments of the hon. Members for West Dorset (Mr. Letwin) and for Brent, North (Mr. Gardiner). The way in which this debate has been conducted has shown how Parliament, when it is at its best, can help to defend British industry and the interests of our country.
It is not often that I say that about the way in which the House scrutinises financial matters. On many other occasions, I have criticised the way in which it has dealt


with expenditure, and the way in which it deals with tax matters is not often to be praised. We often consider new clauses and amendments late in the day and do not have sufficient time to debate them. One could apply that criticism to some measures in the Bill, but the Government have consulted recently and that has assisted us in our work. I add my support to the call of the hon. Member for West Dorset that the Government continue with that consultative process as we wait to see how these complex measures work in practice. If the Paymaster General can assure us that they will deal with the issue in the pre-Budget report and that they will at least consider the need for possible retrospective legislative change, that will be incredibly helpful.
One could, at this point, make several party political points about the whole process and say that lessons need to be learned. However, those lessons probably have been learned—I certainly hope so. It would be a wise idea for Ministers to listen to their officials and not just to their political advisers. If officials had been in charge of drawing up the Bill, we would not have faced the problems of the past few months. We would have had better legislation if the proposal that we are now examining had been introduced in a more considered fashion. The hon. Gentleman is probably right to say that onshore pooling is probably superior to the old offshore regime, but it would have been better if such a move had been made after substantial consultation and had not been rushed through in a short time.
I wish to reflect on one or two details that give rise to slight cause for concern. The first appears in Government amendment No. 106 and in the proposed new section 806H to the Taxes Act 1988 which is headed "Surrender of relievable tax by one company in a group". The arrangements for group provisions for other areas of taxation are often made by primary legislation, but the proposed new section 806H suggests that that should be done by regulation in this case. That is unusual. Perhaps when the parliamentary draftsmen were trying to put such detailed legislation together, they felt that they had no other alternative. One can have sympathy for that view. However, it is not necessarily a good precedent and it is not how group relief is dealt with for other taxation purposes.
I associate myself with a point made about how the cap relates to subsidiaries in Tokyo. That issue is a cause for concern. The current proposal relates to both the cap and to the underlying withholding tax. Perhaps it should be reconsidered at a later stage.
A separate point on the relief of capital gains on the sale of shareholdings has been brought to my attention. It may relate to the point that the hon. Gentleman made about the United States tax regime, but my point applies to Dutch mixer companies. It is my understanding that, when a subsidiary held via a Dutch mixer is sold, there is no UK tax on that gain. Is the Paymaster General concerned that, when a UK onshore mixer company sells a subsidiary, it will face a capital gains tax liability that would not exist if a Dutch mixer company is closed and moves onshore as the result of restructuring? I am not sure whether that is so, but I would be grateful if the Government could reassure me on that point.

Mr. Letwin: I am sorry to return the hon. Gentleman to his point about the proposed new section 806H.

On re-examining it, I do not understand his argument. It seems appropriate that the surrender by one group to another of the relievable tax should be organised by regulation. Is he suggesting that there should be a statutory provision describing exactly how that should be done?

Mr. Davey: My point was that group relief in other areas of the tax system and tax legislation tends to be provided for by primary legislation. Therefore, there is no parallel with this provision. I wanted the Government to explain their thinking. Because this proposal was made in a hurry, I can understand why it will be made through regulation, but I hope that it does not set a precedent. One normally wants group taxation to be provided for by primary legislation.

Mr. Letwin: In that case, I agree with the hon. Gentleman. In due course, the proposal should be put into statute. However, can he and I not agree that it would be better to assess experience and to understand what the rules should be before we enact the measure? It is right that there should be some rules, but they need to be in regulations at the outset. However, we hope—next year or the year after—to put them into statute.

Mr. Davey: I am more than happy to concede that point.

Dawn Primarolo: I intend to follow in the spirit of agreement that has broken out. If the hon. Gentleman reads the provisions of the proposed new section 806H(3), he will see that the regulations made under 806H(1)
may make different provision for different cases … may contain such supplementary, incidental, consequential or transitional provision as the Board may think fit.
Given the complexity of the issue, it is appropriate to put such measures into regulations that we will have an opportunity to discuss. That does not set precedent. The House has used regulations in that way for some time. Given the complexity of the points made by all the contributors to the debate, and what the hon. Gentleman has said in the past about consultation, that is the most sensible way to proceed.

Mr. Davey: I did not wish to make this a major issue. I was merely trying to make sure that the Government realise that they have approached group relief arrangements differently from the way in which they have dealt with other tax legislation. I understand that there are special circumstances and I am sure that the Government are right to wish to consult on the detail. That is why I shall certainly not vote against the amendment.
I return to the point that I may not have been making terribly well. I mentioned Dutch mixer companies and capital gains tax liabilities on the sale of subsidiaries. If such companies move onshore into UK mixer companies, will the Government introduce measures for CGT relief on the sales of the overseas subsidiaries of the UK-based onshore mixer companies? It is possible that I have not understood the point properly, but I would be grateful if the Minister could try to explain it to me.

Dawn Primarolo: The hon. Gentleman may be struggling with the concept of a mixer company. It is simply a vehicle and its location is determined by where its board


meets and by the nationality of those on the board. Its sole function is to funnel profits to the UK having mixed them offshore. He is making a point about mixer companies that does not apply because the provisions relate to payments that come directly to the UK.

8 pm

Mr. Davey: The Paymaster General may be right, but I have been led to believe that some mixer companies have subsidiaries; Dutch mixer companies have had subsidiaries. The way in which those companies are constructed is often complicated. The complexity is not necessarily driven by tax reasons. I should be grateful if the Paymaster General reflected on that when she replied to the debate.
Does the Paymaster General have a forecast or estimate of the expected yield of the proposals? We heard a range of forecasts for the expected yield of the original proposals. The Government have spent much time on the matter, and I wonder whether the Paymaster General could tell the House the expected revenue yield, or whether no Exchequer gain is expected from the proposals.
When the Government propose major changes to the tax system in future Finance Bills, I hope that they will have learned lessons from this year and that they will abide by their code on consultation. If they do that, we will not again get into the current mess over double taxation relief.

Dawn Primarolo: I shall reply briefly to the points that were made by the hon. Member for West Dorset (Mr. Letwin), my hon. Friend the Member for Brent, North (Mr. Gardiner) and the hon. Member for Kingston and Surbiton (Mr. Davey). I am sure that hon. Members who have spoken will agree that it is especially important that none of my comments add uncertainty to an extremely complex aspect of taxation. They will therefore forgive me if I do not respond as fully as they would like to some of their points.
We are considering large companies making decisions about their structure and about their best interests in maximising the benefits that are available in, for example, the new arrangements for onshore pooling. I shall therefore be careful about what I say on that.
The hon. Member for West Dorset mentioned drafting. I hope that it will be possible to clear up several points in the guidance so that, for now, at least the guidance will be clearly understood by the Revenue and the relevant companies. The hon. Gentleman also mentioned withholding tax. I have considered the point that he made and I examined the January 2000 KPMG corporate tax survey. It considers corporate tax rates and withholding, if it exists. I am not surprised that the hon. Gentleman picked the one place where the combination of withholding and corporate tax might create a higher level than the 45 per cent.

Mr. Letwin: I mentioned two places: Tokyo and New York. I feel more confident that I am right about New York than about Tokyo. However, will the Paymaster General admit that New York is not any old place? It is where the largest number of major subsidiaries of UK-based multinationals are located. The point that I made is therefore of some importance.

Dawn Primarolo: I would not want to insinuate that Tokyo or New York were "any old place"—heaven

forbid! The 45 per cent. rate is extremely generous. While the difference that may arise is not insignificant to companies, it is only just above the cap. In fairness to the hon. Gentleman, and to provide certainty about the matter, the answer to his direct question about whether I would review the 45 per cent. rate is no.
The hon. Member for West Dorset also mentioned company structures. He concentrated on the United States preferred company structure as opposed to that in the United Kingdom; the flat structure that the US operates rather than what could be described as a chain structure. The hon. Gentleman mentioned costs in the US. A company may consider it necessary to move the US company so that it has a completely flat structure, which would relate to the UK, to maximise the benefits. That would entail costs. The relevant company would have to consider the benefits of restructuring its operations. That would be a commercial decision for the company, which would have to balance the costs of restructuring with the benefits that might accrue from it. Companies are already doing that in terms of the acquisitions of US-UK groups. We are considering vast companies. The decisions are always complex and involve vast amounts of money and much consideration.
The hon. Member for West Dorset kept saying, "if there is a real problem". I do not deny that restructuring will involve costs for some companies. I do not believe that that is a real problem in the way in which the hon. Gentleman suggests, although, as with any legislation, the Government have to be watchful about its operation. We have an annual opportunity to consider whether the measure is operating correctly and to remedy it if not. We are considering complex matters, which we will supervise closely.
I am not currently attracted to helping with transitional costs. The benefits to the companies of being linked directly to the UK are enormous. Apart from the 45 per cent., there is the carry-back of three years to offset a liability, indefinite carry-forward and the ability to surrender to another company in the group for use against uncapped lower dividends. Holding those assets directly is greatly beneficial to the company and the UK economy.

Mr. Letwin: I accept that the carry-back and carry-forward provisions, and the relief provisions in general, may be attractive. Will the Paymaster General at least give us an assurance that, if representatives of major multinationals with their headquarters in the UK wish, they will have the opportunity to see her or her senior officials to explain the tax consequences, as the year progresses, in the US, or north America generally, of restructuring so that sub-subsidiaries of current Dutch BVs—limited companies—and other vehicles are brought under the direct ownership of the UK headquarter company? Will she assure us that she will consider those representations seriously and take them into account when drafting next year's Finance Bill?

Mr. Flight: rose—

Dawn Primarolo: I shall deal with the point raised by the hon. Member for West Dorset before giving way to the hon. Member for Arundel and South Downs (Mr. Flight). One at a time, please.
The Government have clearly demonstrated in the development of their policy that they are prepared to hold discussions and listen to the points that companies and


many other people want to make about our proposals. There is no reason why that practice should not continue. Indeed, we have met a huge number of representative groups and large companies. The hon. Gentleman asks whether the Treasury and the Inland Revenue will engage in discussions with companies; of course we will, but we should do so anyway.

Mr. Flight: It is perfectly reasonable that British-based multinationals should not have everything all ways round. However, much as I support our alliance with the United States, I would not wish to stimulate a massive gratuitous payment of tax to the United States authorities. It would be better if that tax came to the UK authorities.

Dawn Primarolo: Indeed. As strong as our cultural, historical and business ties with the United States might be, our friendship would not extend to providing income for them. The hon. Gentleman knows a great deal about how complex the matter is, and he will have appreciated my points on providing certainty.
I agree with my hon. Friend the Member for Brent, North about the way in which the debate has been handled. It has been fraught at times for me at the Dispatch Box, but I feel that I have accounted for myself and the Government's policy clearly. We have developed a good policy. My hon. Friend is right to pay tribute to the officials who have supported Ministers in that exercise at the Inland Revenue and the Treasury.
I know that the hon. Member for Kingston and Surbiton does not believe everything he reads in the newspapers, so I can tell him that the scurrilous remarks about a division between political advisers and officials inside the Treasury and the Inland Revenue were not correct. The Treasury, the Inland Revenue, Ministers and special advisers work as a superb team to develop good policy—as we have done in this respect—with assistance from some others en route. I have dealt with the point about regulation and why section 806H of the Taxes Act 1988 deals with that.
The hon. Member for Kingston and Surbiton asked about capital gains tax on mixer companies. There may be a slight misunderstanding about that. The Inland Revenue is currently consulting on the roll-over relief for capital gains on sales of substantial shareholdings. He will have heard me refer to that in Committee. That will include shareholdings in trading companies that would have avoided capital gains in the mixer companies. That is subject to current consultation by the Government, and would cover the point raised by the hon. Gentleman.
Finally, the hon. Gentleman asked about yield. I direct him to the Inland Revenue's press release of 16 June. There have been huge estimates, with great variations, of how much would be raised or lost. I have explained how the Government systematically tried to measure the cost by looking at previous years. The Inland Revenue made it clear that given the scale of avoidance that has come to light since the Budget, the impact of the overall package represented by the changes—including onshore provisions—would be broadly similar to the estimates provided in the "Financial Statement and Budget Report". The hon. Gentleman wondered whether the Government were going to raise tax, but the figures are approximately the same.
I hope, therefore, that I have dealt with all the issues that have been raised. I hope that this closes the chapter on double taxation relief for this Finance Bill.

Amendment agreed to.

Amendments made: No. 104, in page 513, line 35, leave out from beginning to end of line 26 on page 514 and insert—

'Restriction of relief for underlying tax: dividends paid between related
companies

10.—(1) Amend section 801 of the Taxes Act 1988 as follows.

(2) After subsection (2) (cases where the overseas company receives a dividend from a related third company) insert—

"(2A) Section 799(1)(6) applies for the purposes of subsection (2) above only—
(a) if the overseas company and the third company are not resident in the same territory; or
(b) in such other cases as may be prescribed by regulations made by the Treasury."

(3) This paragraph has effect in relation to any claim for an allowance by way of credit made on or after 31st March 2001 in respect of a dividend paid by a company resident outside the United Kingdom to a company resident in the United Kingdom. unless the dividend was paid before that date.

(4) In determining, for the purpose of any such claim made on or after that date, the underlying tax of any such third, fourth or successive company as is mentioned in section 801(2) or (3) of the Taxes Act 1988, this paragraph shall be deemed to have had effect at the time the dividend paid by that company was paid.'.

No. 105, in page 515, line 9, at end insert—

'Separate streaming of dividend so far as representing an ADP
dividend of a CFC

11A.—(1) After section 801B of the Taxes Act 1988 insert—
"Separate streaming of dividend so far as representing an ADP dividend of a CFC
801C.—(1) This section applies in any case where—
(a) by virtue only of section 748(1)(a), no apportionment under section 747(3) falls to be made as regards an accounting period of a controlled foreign company; and
(b) one or more of the dividends paid by the controlled foreign company by virtue of which the condition in paragraph (a) above is satisfied are dividends falling within subsection (2) below.
(2) A dividend falls within this subsection if, for the purposes of Part I of Schedule 25, the whole or any part of it falls to be treated by virtue of paragraph 4 of that Schedule as paid by the controlled foreign company to a United Kingdom resident.
(3) If, in a case where this section applies,—
(a) an initial dividend is paid to a company resident outside the United Kingdom, and
(b) that company, or any other company which is related to it, pays an intermediate dividend which for the purposes of paragraph 4 of Schedule 25 to any extent represents that initial dividend,
subsection (4) below shall have effect in relation to the UK recipient concerned.
(4) Where this subsection has effect, it shall be assumed for the purposes of allowing credit relief under this Part to that UK recipient—
(a) that, instead of the intermediate dividend, the dividends described in subsection (5) below had been paid and the circumstances had been as described in subsection (6) or (7) below, as the case may be; and


(b) that any tax paid under the law of any territory in respect of the intermediate dividend, or which is underlying tax in relation to that dividend, had instead fallen to be borne accordingly (taking account of any reduction falling to be made under section 799(2)).
(5) The dividends mentioned in subsection (4)(a) above are—
(a) as respects each of the initial dividends which are, for the purposes of paragraph 4 of Schedule 25, to any extent represented by the intermediate dividend, a separate dividend (an "ADP dividend") representing, and of an amount equal to, so much of that initial dividend as is for those purposes represented by the intermediate dividend; and
(b) a further separate dividend (a "residual dividend") representing, and of an amount equal to, the remainder (if any) of the intermediate dividend.
(6) As respects each of the ADP dividends, the intermediate company is to be treated as if it were a separate company whose distributable profits are of a constitution corresponding to, and an amount equal to, that of the ADP dividend.
(7) As respects the residual dividend (if any), the relevant profits out of which it is to be regarded for the purposes of section 799(1) as paid by the intermediate company are, in consequence of subsection (6) above, to be treated as being of such constitution and amount as remains after excluding accordingly so much of those relevant profits as constitute the whole or any part of the distributable profits out of which the ADP dividends are paid.
(8) If, in a case where this section applies, an intermediate company also pays a dividend which is not an intermediate dividend (an "independent dividend") and either—
(a) that dividend is paid to a United Kingdom resident, or
(b) if it is not so paid, a dividend which to any extent represents it is paid by a company which is related to that company and resident outside the United Kingdom to a United Kingdom resident,
subsection (9) below shall have effect in relation to the United Kingdom resident.
(9) Where this subsection has effect, it shall be assumed for the purposes of allowing credit relief under this Part to the United Kingdom resident—
(a) that the relevant profits out of which the independent dividend is to be regarded for the purposes of section 799(1) as paid by the intermediate company are, in consequence of subsection (6) above, to be treated as being of such constitution and amount as remains after excluding so much of those relevant profits as constitute the whole or any part of the distributable profits out of which the ADP dividends are paid; and
(b) that any tax paid under the law of any territory in respect of the independent dividend, or which is underlying tax in relation to that dividend, had instead fallen to be borne accordingly (taking account of any reduction falling to be made under section 799(2)).
(10) For the purposes of this section—
(a) a controlled foreign company is an "ADP controlled foreign company" as respects any of its accounting periods if the condition in paragraph (a) of subsection (1) above is satisfied as respects that accounting period;
(b) an "initial dividend" (subject to subsection (14) below) is any of the dividends mentioned in paragraph (b) of subsection (1) above paid by an ADP controlled foreign company; and
(c) a "subsequent dividend" is any dividend which, in relation to one or more initial dividends, is the subsequent dividend for the purposes of paragraph 4 of Schedule 25.

(11) In this section—
distributable profits" means a company's profits available for distribution, determined in accordance with section 799(6);
intermediate company" means any company resident outside the United Kingdom which pays an intermediate dividend:
intermediate dividend" means any dividend which is paid by a company resident outside the United Kingdom and which—
(a) for the purposes of paragraph 4 of Schedule 25. to any extent represents one or more initial dividends paid by other companies; and
(b) either is the subsequent dividend in the case of those initial dividends or is itself to any extent represented for those purposes by a subsequent dividend;
"the UK recipient" means the United Kingdom resident to whom a subsequent dividend is paid.
(12) Where—
(a) one company pays a dividend ("dividend A") to another company, and
(b) that other company, or a company which is related to it, pays a dividend ("dividend B") to another company,
then, for the purposes of this section, dividend B represents dividend A, and dividend A is represented by dividend B, to the extent that dividend B is paid out of profits which are derived, directly or indirectly, from the whole or part of dividend A.
(13) Sub-paragraph (2) of paragraph 4 of Schedule 25 (related companies) shall apply for the purposes of this section as it applies for the purposes of that paragraph.
(14) Where an intermediate company which is an ADP controlled foreign company pays a dividend—
(a) by virtue of which (whether taken alone or with other dividends) the condition in subsection (1)(a) above is satisfied as regards an accounting period of the company, but
(b) which also for the purposes of paragraph 4 of Schedule 25 to any extent represents one or more initial dividends paid by other ADP controlled foreign companies,
the dividend shall not be regarded for the purposes of this section as an initial dividend paid by the company, to the extent that it so represents initial dividends paid by other ADP controlled foreign companies.
(2) This paragraph has effect in relation to any claim for an allowance by way of credit made on or after 31st March 2001 in respect of a dividend paid by a company resident outside the United Kingdom to a company resident in the United Kingdom, unless the dividend was paid before that date.
(3) In determining, for the purpose of any such claim made on or after that date, the underlying tax of any such third, fourth or successive company as is mentioned in section 801(2) or (3) of the Taxes Act 1988, this paragraph shall be deemed to have had effect at the time the dividend paid by that company was paid.'.

No. 106, in page 522, line 24, leave out from beginning to end of line 6 on page 527 and insert—

'Foreign dividends: onshore pooling and utilisation of certain
unrelieved foreign tax

19.—(1) After section 806 of the Taxes Act 1988 insert—

"Foreign dividends: onshore pooling and utilisation of eligible unrelieved foreign tax

Eligible unrelieved foreign tax on dividends: introductory

806A.—(1) This section applies where, in any accounting period of a company resident in the United Kingdom, an


amount of eligible unrelieved foreign tax arises in respect of a dividend falling within subsection (2) below paid to the company.

(2) The dividends that fall within this subsection are any dividends chargeable under Case V of Schedule D, other than—
(a) any dividend which is trading income for the purposes of section 393;
(b) any dividend which, in the circumstances described in paragraphs (a) and (b) of subsection (8) of section 393, would by virtue of that subsection fall to be treated as trading income for the purposes of subsection (1) of that section;
(c) in a case where section 801A applies, the dividend mentioned in subsection (1)(b) of that section;
(d) in a case where section 803 applies, the dividend mentioned in subsection (1)(b) of that section;
(e) any dividend the amount of which is, under section 811, treated as reduced.

(3) For the purposes of this section—
(a) the cases where an amount of eligible unrelieved foreign tax arises in respect of a dividend falling within subsection (2) above are the cases set out in subsections (4) and (5) below; and
(b) the amounts of eligible unrelieved foreign tax which arise in any such case are those determined in accordance with section 806B.

(4) Case A is where—
(a) the amount of the credit for foreign tax which under any arrangements would, apart from section 797, be allowable against corporation tax in respect of the dividend, exceeds
(b) the amount of the credit for foreign tax which under the arrangements is allowed against corporation tax in respect of the dividend.

(5) Case B is where the amount of tax which, by virtue of any provision of any arrangements, falls to be taken into account as mentioned in section 799(1) in the case of the dividend (whether or not by virtue of section 801(2) or (3)) is less than it would be apart from the mixer cap.

(6) In determining whether the circumstances are as set out in subsection (4) or (5) above, sections 806C and 806D shall be disregarded.

The amounts that are eligible unrelieved foreign tax

806B.—(1) This section has effect for determining the amounts of eligible unrelieved foreign tax which arise in the cases set out in section 806A(4) and (5).

(2) In Case A, the difference between—
(a) the amount of the credit allowed as mentioned in section 806A(4)(b), and
(b) the greater amount of the credit that would have been so allowed if, for the purposes of subsection (2) of section 797, the rate of corporation tax payable as mentioned in that subsection were the upper percentage,
shall be an amount of eligible unrelieved foreign tax.

(3) In Case B, where the mixer cap restricts the amount of tax to be taken into account as mentioned in section 799(1) in the case of the Case V dividend, the difference, in the case of that dividend, between—
(a) the amount of tax to be taken into account as there mentioned, and
(b) the greater amount of tax that would have been taken into account as there mentioned, had M in the formula in section 799(1A) in its application in the case of that dividend (but not any lower level dividend) been the upper percentage,
shall be an amount of eligible unrelieved foreign tax.

(4) In Case B, where the mixer cap—
(a) restricts the amount of underlying tax that is treated as mentioned in subsection (2) or (3) of section 801 in the case of any dividend received as mentioned in that subsection, but
(b) does not restrict the relevant tax in the case of any higher level dividend,
subsection (5) below shall apply.

(5) Where this subsection applies, an amount equal to the appropriate portion of the difference, in the case of the dividend mentioned in subsection (4)(a) above, between—
(a) the amount of underlying tax treated as mentioned in section 801(2) or (3), as the case may be, and
(b) the greater amount of underlying tax that would have been so treated, had M in the formula in section 799(1A) in its application in the case of that dividend (but not any higher or lower level dividend) been the upper percentage,
shall be an amount of eligible unrelieved foreign tax.

(6) For the purposes of subsection (5) above, the "appropriate portion" of the difference there mentioned in the case of any dividend is found by multiplying the amount of that difference by the product of the reducing fractions for each of the higher level dividends.

(7) For the purposes of subsection (6) above, the "reducing fraction" for any dividend is the fraction—
(a) whose numerator is the amount of the dividend; and
(b) whose denominator is the amount of the relevant profits (within the meaning of section 799(1)) out of which the dividend is paid.

(8) Any reference in this section to any tax being restricted by the mixer cap in the case of any dividend is a reference to that tax being so restricted otherwise than by virtue only of the application of the mixer cap in the case of one or more lower level dividends.

(9) For the purpose of determining the amount described in subsection (2)(b), (3)(b) or (5)(b) above, sections 806C and 806D shall be disregarded.

(10) In this section—

"the Case V dividend" means the dividend mentioned in section 806A(1);
"higher level dividend", in relation to another dividend, means any dividend—
(a) by which that other dividend is to any extent represented; and
(b) which either is the Case V dividend or is to any extent represented by the Case V dividend;

"lower level dividend", in relation to another dividend, means any dividend which—
(a) is received as mentioned in section 801(2) or (3); and
(b) is to any extent represented by that other dividend;

"the relevant tax" means—
(a) in the case of the Case V dividend, the foreign tax to be taken into account as mentioned in section 799(1); and
(b) in the case of any other dividend, the amount of underlying tax to be treated as mentioned in section 801(2) or (3) in the case of the dividend.

Onshore pooling

806C.—(1) In this section "qualifying foreign dividend" means any dividend which falls within section 806A(2), other than—
(a) an ADP dividend paid by a controlled foreign company;
(b) so much of any dividend paid by any company as represents an ADP dividend paid by another company which is a controlled foreign company;


(c) a dividend in respect of which an amount of eligible unrelieved foreign tax arises.

(2) For the purposes of this section—
(a) a "related qualifying foreign dividend" is any qualifying foreign dividend paid to a company resident in the United Kingdom by a company which, at the time of payment of the dividend, is related to that company;
(b) an "unrelated qualifying foreign dividend" is any qualifying foreign dividend which is not a related qualifying foreign dividend.

(3) For the purposes of giving credit relief under this Part to a company resident in the United Kingdom—
(a) the related qualifying foreign dividends that arise to the company in an accounting period shall be aggregated;
(b) the unrelated qualifying foreign dividends that arise to the company in an accounting period shall be aggregated;
(c) the underlying tax in relation to the related qualifying foreign dividends that arise to the company in an accounting period shall be aggregated;
(d) so much of the foreign tax paid in respect of the qualifying foreign dividends that arise to the company in an accounting period as is not underlying tax shall be aggregated.

(4) Credit relief under this Part shall be given as if—
(a) the related qualifying foreign dividends aggregated under paragraph (a) of subsection (3) above in the case of any accounting period instead together constituted a single related qualifying foreign dividend arising in that accounting period ("the single related dividend" arising in that accounting period);
(b) the unrelated qualifying foreign dividends aggregated under paragraph (b) of that subsection in the case of any accounting period instead together constituted a single unrelated qualifying foreign dividend arising in that accounting period ("the single unrelated dividend" arising in that accounting period);
(c) the underlying tax aggregated under paragraph (c) of that subsection for any accounting period were instead underlying tax in relation to the single related dividend arising in that accounting period (the "aggregated underlying tax" in respect of the single related dividend);
(d) the tax aggregated under paragraph (d) of that subsection for any accounting period were instead foreign tax (other than underlying tax) paid in respect of, and computed by reference to,—
(i) the single related dividend arising in that accounting period,
(ii) the single unrelated dividend so arising, or
(iii) partly the one dividend and partly the other,
(that aggregated tax being referred to as the "aggregated withholding tax").

(5) For the purposes of this section. a dividend paid by a controlled foreign company is an "ADP dividend" if it is a dividend by virtue of which (whether in whole or in part and whether taken alone or with one or more other dividends) no apportionment under section 747(3) falls to be made as regards an accounting period of the controlled foreign company in a case where such an apportionment would fall to be made apart from section 748(1)(a).

Utilisation of eligible unrelieved foreign tax

806D.—(1) For the purposes of this section, where—
(a) any eligible unrelieved foreign tax arises in an accounting period of a company, and
(b) the dividend in relation to which it arises is paid by a company which, at the time of payment of the dividend, is related to that company,

that tax is "eligible underlying tax" to the extent that it consists of or represents underlying tax.

(2) To the extent that any eligible unrelieved foreign tax is not eligible underlying tax it is for the purposes of this section "eligible withholding tax".

(3) For the purposes of giving credit relief under this Part to a company resident in the United Kingdom—
(a) the amounts of eligible underlying tax that arise in an accounting period of the company shall be aggregated (that aggregate being referred to as the "relievable underlying tax" arising in that accounting period); and
(b) the amounts of eligible withholding tax that arise in an accounting period of the company shall be aggregated (that aggregate being referred to as the "relievable withholding tax" arising in that accounting period).

(4) The relievable underlying tax arising in an accounting period of the company shall be treated for the purposes of allowing credit relief under this Part as if it were—
(a) underlying tax in relation to the single related dividend that arises in the same accounting period,
(b) relievable underlying tax arising in the next accounting period (whether or not any related qualifying foreign dividend in fact arises to the company in that accounting period), or
(c) underlying tax in relation to the single related dividend that arises in such one or more preceding accounting periods as result from applying the rules in section 806E,
or partly in one of those ways and partly in each or either of the others.

(5) The relievable withholding tax arising in an accounting period of the company shall be treated for the purposes of allowing credit relief under this Part as if it were—
(a) foreign tax (other than underlying tax) paid in respect of, and computed by reference to, the single related dividend or the single unrelated dividend that arises in the same accounting period,
(b) relievable withholding tax arising in the next accounting period (whether or not any qualifying foreign dividend in fact arises to the company in that accounting period), or
(c) foreign tax (other than underlying tax) paid in respect of, and computed by reference to, the single related dividend or the single unrelated dividend that arises in such one or more preceding accounting periods as result from applying the rules in section 806E,
or partly in one of those ways and partly in any one or more of the others.

(6) The amount of relievable underlying tax or relievable withholding tax arising in an accounting period that is treated—
(a) under subsection (4)(a) or (c) above as underlying tax in relation to the single related dividend arising in the same or any earlier accounting period, or
(b) under subsection (5)(a) or (c) above as foreign tax paid in respect of, and computed by reference to, the single related dividend or the single unrelated dividend arising in the same or any earlier accounting period,
must not be such as would cause an amount of eligible unrelieved foreign tax to arise in respect of that dividend.

Rules for carry back of relievable tax under section 806D

806E.—(1) Where any relievable tax is to be treated as mentioned in section 806D(4)(c) or (5)(c), the rules for determining the accounting periods in question (and the amount of the relievable tax to be so treated in relation to each of them) are those set out in the following provisions of this section.

(2) Rule 1 is that the accounting periods in question must be accounting periods beginning not more than three years before the accounting period in which the relievable tax arises.

(3) Rule 2 is that the relievable tax must be so treated that—
(a) credit for, or for any remaining balance of, the relievable tax is allowed against corporation tax in respect of the single dividend arising in a later one of the accounting periods beginning as mentioned in rule 1 above,
(b) credit for any of the relievable tax is allowed against corporation tax in respect of the single dividend arising in any earlier such accounting period.

(4) Rule 3 is that the relievable tax must be so treated that. before allowing credit for any of the relievable tax against corporation tax in respect of the single dividend arising in any accounting period, credit for foreign tax is allowed—
(a) first for the aggregated foreign tax in respect of the single dividend arising in that accounting period, so far as not consisting of relievable tax arising in another accounting period; and
(b) then for relievable tax arising in any accounting period before that in which the relievable tax in question arises.

(5) The above rules are subject to sections 806D(6) and 806F.

(6) In this section—
aggregated foreign tax" means aggregated underlying tax or aggregated withholding tax;
relievable tax" means relievable underlying tax or relievable withholding tax;
the single dividend" means—
(a) in relation to relievable underlying tax, the single related dividend; and
(b) in relation to relievable withholding tax, the single related dividend or the single unrelated dividend.

Credit to be given for underlying tax before other foreign tax
etc

806F.—(1) For the purposes of this Part, credit in accordance with any arangements shall, in the case of any dividend, be given so far as possible—
(a) for underlying tax (where allowable) before foreign tax other than underlying tax;
(b) for foreign tax other than underlying tax before amounts treated as underlying tax; and
(c) for amounts treated as underlying tax (where allowable) before amounts treated as foreign tax other than underlying tax.

(2) Accordingly, where the amount of foreign tax to be brought into account for the purposes of allowing credit relief under this Part is subject to any limitation or restriction, the limitation or restriction shall be taken to have the effect of excluding foreign tax other than underlying tax before excluding underlying tax.

Claims for the purposes of section 806D(4) or (5)

806G.—(l) The relievable underlying tax or relievable withholding tax arising in any accounting period shall only be treated as mentioned in subsection (4) or (5) of section 806D on a claim.

(2) Any such claim must specify the amount (if any) of that tax—
(a) which is to be treated as mentioned in paragraph (a) of the subsection in question;
(b) which is to be treated as mentioned in paragraph (b) of that subsection; and
(c) which is to be treated as mentioned in paragraph (c) of that subsection.

(3) A claim under subsection (1) above may only be made before the expiration of the period of—
(a) six years after the end of the accounting period mentioned in that subsection; or

(b) if later, one year after the end of the accounting period in which the foreign tax in question is paid.

Surrender of relievable tax by one company in a group to
another

806H.—(1) The Board may by regulations make provision for, or in connection with, allowing a company which is a member of a group to surrender all or any part of the amount of the relievable tax arising to it in an accounting period to another company which is a member of that group at the time, or throughout the period, prescribed by the regulations.

(2) The provision that may be made under subsection (1) above includes provision—
(a) prescribing the conditions which must be satisfied if a surrender is to be made;
(b) determining the amount of relievable tax which may be surrendered in any accounting period;
(c) prescribing the conditions which must be satisfied if a claim to surrender is to be made;
(d) prescribing the consequences for tax purposes of a surrender having been made;
(e) allowing a claim to be withdrawn and prescribing the effect of such a withdrawal.

(3) Regulations under subsection (1) above—
(a) may make different provision for different cases; and
(b) may contain such supplementary, incidental, consequential or transitional provision as the Board may think fit.

(4) For the purposes of subsection (1) above a company is a member of a group if the conditions prescribed for that purpose in the regulations are satisfied.

interpretation of foreign dividend provisions of this Chapter

806J.—(1) This section has effect for the interpretation of the foreign dividend provisions of this Chapter.

(2) In this section, "the foreign dividend provisions of this Chapter" means sections 806A to 806Hon. and this section.

(3) For the purposes of the foreign dividend provisions of this Chapter, where—
(a) one company pays a dividend ("dividend A") to another company, and
(b) that other company, or a company which is related to it, pays a dividend ("dividend B") to another company,
dividend B represents dividend A, and dividend A is represented by dividend B, to the extent that dividend B is paid out of profits which are derived, directly or indirectly, from the whole or part of dividend A.

(4) Where—
(a) one company is related to another, and
(b) that other is related to a third company,
the first company shall be taken for the purposes of paragraph (b) of subsection (3) above to be related to the third, and so on where there is a chain of companies, each of which is related to the next.

(5) In any case where—
(a) a company resident outside the United Kingdom pays a dividend to a company resident in the United Kingdom, and
(b) the circumstances are such that subsection (6)(b) of section 790 has effect in relation to that dividend.
the foreign dividend provisions of this Chapter shall have effect as if the company resident outside the United Kingdom were related to the company resident in the United Kingdom (and subsection (10) of that section shall have effect accordingly).

(6) Subsection (5) of section 801 (related companies) shall apply for the purposes of the foreign dividend provisions of this Chapter as it applies for the purposes of that section.

(7) In the foreign dividend provisions of this Chapter—
"aggregated underlying tax" shall be construed in accordance with section 806C(4)(c);
"aggregated withholding tax" shall be construed in accordance with section 806C(4)(d);
"controlled foreign company" has the same meaning as in Chapter IV of Part XVII;
"eligible unrelieved foreign tax" shall be construed in accordance with sections 806A and 806B;
"the mixer cap" means section 799(1)(b);
"qualifying foreign dividend" has the meaning given by section 806C(1);
"related qualifying foreign dividend" has the meaning given by section 806C(2)(a);
"relievable tax" has the meaning given by section 806E(6);
"relievable underlying tax" shall be construed in accordance with 806D(3)(a);
"relievable withholding tax" shall be construed in accordance with 806D(3)(b);
"single related dividend" shall be construed in accordance with section 806C(4)(a);
"single unrelated dividend" shall be construed in accordance with section 806C(4)(b);
"the upper percentage" is 45 per cent."

(2) The amendments made by sub—paragraph (1) have effect in relation to—
(a) dividends arising on or after 31st March 2001, and
(b) foreign tax in respect of such dividends,
(and accordingly the single related dividend or the single unrelated dividend which falls to be treated under those amendments as arising in any accounting period of a company shall not include any dividend arising on or before 30th March 2001).

Application of foreign dividend provisions to branches or agencies
in the UK of persons resident elsewhere

20.—(1) After section 806J of the Taxes Act 1988 insert—

"Application of foreign dividend provisions to branches or
agencies in the UK of persons resident elsewhere

806K.—(1) Sections 806A to 806J shall apply in relation to an amount of eligible unrelieved foreign tax arising in a chargeable period in respect of any of the income of a branch or agency in the United Kingdom of a person resident outside the United Kingdom as they apply in relation to eligible unrelieved foreign tax arising in an accounting period of a company resident in the United Kingdom in respect of any of the company's income, but with the modifications specified in subsection (2) below.

(2) Those modifications are—
(a) take any reference to an accounting period as a reference to a chargeable period;
(b) take any reference to corporation tax as including a reference to income tax;
(c) take the reference in section 806A(4)(a) to section 797 as a reference to sections 796 and 797;
(d) in relation to income tax, for subsection (2) of section 806B substitute the subsection (2) set out in subsection (3) below.

(3) That subsection is—

"(2) In Case A, the difference between—
(a) the amount of the credit allowed as mentioned in section 806A(4)(b), and

(b) the greater amount of credit that would have been so allowed if, for the purposes of section 796, the amount of income tax borne on the dividend as computed under that section were charged at a rate equal to the upper percentage,
shall be an amount of eligible unrelieved foreign tax."."

(2) The amendment made by sub—paragraph (1) has effect in relation to—
(a) dividends arising on or after 31st March 2001, and
(b) foreign tax in respect of such dividends,
(and accordingly the single related dividend or single unrelated dividend which by virtue of that amendment falls to be treated as arising in any chargeable period shall not include any dividend arising on or before 30th March 2001).

Unrelieved foreign tax: profits of overseas branch or agency

20A.—(1) After section 806K of the Taxes Act 1988 insert—

"Unrelieved foreign tax: profits of overseas branch or agency
Carry forward or carry back of unrelieved foreign tax

806L.—(1) This section applies where, in any accounting period of a company resident in the United Kingdom, an amount of unrelieved foreign tax arises in respect of any of the company's qualifying income from an overseas branch or agency of the company.

(2) The amount of the unrelieved foreign tax so arising shall be treated for the purposes of allowing credit relief under this Part as if it were foreign tax paid in respect of, and computed by reference to, the company's qualifying income from the same overseas branch or agency—
(a) in the next accounting period (whether or not the company in fact has any such income from that source in that accounting period), or
(b) in such one or more preceding accounting periods, beginning not more than three years before the accounting period in which the unrelieved foreign tax arises, as result from applying the rules in subsection (3) below,
or partly in the one way and partly in the other.

(3) Where any unrelieved foreign tax is to be treated as mentioned in paragraph (b) of subsection (2) above, the rules for determining the accounting periods in question (and the amount of the unrelieved foreign tax to be so treated in relation to each of them) are that the unrelieved foreign tax must be so treated under that paragraph—

1. that—
(a) credit for, or for any remaining balance of, the unrelieved foreign tax is allowed against corporation tax in respect of income of a later one of the accounting periods beginning as mentioned in that paragraph, before
(b) credit for any of the unrelieved foreign tax is allowed against corporation tax in respect of income of any earlier such period;

2. that, before allowing credit for any of the unrelieved foreign tax against corporation tax in respect of income of any accounting period, credit for foreign tax is allowed—
(a) first for foreign tax in respect of the income of that accounting period, other than unrelieved foreign tax arising in another accounting period; and
(b) then for unrelieved foreign tax arising in any accounting period before that in which the unrelieved foreign tax in question arises.

(4) For the purposes of this section, the cases where an amount of unrelieved foreign tax arises in respect of any of a company's qualifying income from an overseas branch or agency in an accounting period are those cases where—


(a) the amount of the credit for foreign tax which under any arrangements would, apart from section 797, be allowable against corporation tax in respect of that income, exceeds
(b) the amount of the credit for foreign tax which under the arrangements is allowed against corporation tax in respect of that income;
and in any such case that excess is the amount of the unrelieved foreign tax in respect of that income.

(5) For the purposes of this section, a company's qualifying income from an overseas branch or agency is the profits of the overseas branch or agency which are—
(a) chargeable under Case I of Schedule D; or
(b) included in the profits of life reinsurance business or overseas life assurance business chargeable under Case VI of Schedule D by virtue of section 439B or 441.

(6) Where (whether by virtue of this subsection or otherwise) an amount of unrelieved foreign tax arising in an accounting period falls to be treated under subsection (2) above for the purposes of allowing credit relief under this Part as foreign tax paid in respect of, and computed by reference to, qualifying income of an earlier accounting period, it shall not be so treated for the purpose of any further application of this section.

(7) In this section "overseas branch or agency", in relation to a company, means a branch or agency through which the company carries on a trade in a territory outside the United Kingdom.

Provisions supplemental to section 806L

806M.—(1) This section has effect for the purposes of section 806L and shall be construed as one with that section.

(2) If, in any accounting period, a company ceases to have a particular overseas branch or agency, the amount of any unrelieved foreign tax which arises in that accounting period in respect of the company's income from that overseas branch or agency shall, to the extent that it is not treated as mentioned in section 806L(2)(b), be reduced to nil (so that no amount arises which falls to be treated as mentioned in section 806L(2)(a)).

(3) If a company—
(a) at any time ceases to have a particular overseas branch or agency in a particular territory ("the old branch or agency"), but
(b) subsequently again has an overseas branch or agency in that territory ("the new branch or agency"),
the old branch or agency and the new branch or agency shall be regarded as different overseas branches or agencies.

(4) If, under the law of a territory outside the United Kingdom, tax is charged in the case of a company resident in the United Kingdom in respect of the profits of two or more of its overseas branches or agencies in that territory, taken together, then, for the purposes of—
(a) section 806L, and
(b) subsection (3) above.
those overseas branches or agencies shall be treated as if they together constituted a single overseas branch or agency of the company.

(5) Unrelieved foreign tax arising in respect of qualifying income from a particular overseas branch or agency in any accounting period shall only be treated as mentioned in subsection (2) of section 806L on a claim.

(6) Any such claim must specify the amount (if any) of the unrelieved foreign tax—
(a) which is to be treated as mentioned in paragraph (a) of that subsection; and
(b) which is to be treated as mentioned in paragraph (b) of that subsection.

(7) A claim under subsection (5) above may only be made before the expiration of the period of—
(a) six years after the end of the accounting period mentioned in that subsection, or
(b) if later, one year after the end of the accounting period in which the foreign tax in question is paid."

(2) The amendment made by sub-paragraph (1) has effect in relation to unrelieved foreign tax arising in any accounting period ending on or after 1st April 2000.

(3) No such tax shall be treated by virtue of that amendment as foreign tax in respect of income arising in any accounting period ended on or before 31st March 2000.'.

No. 107, in page 531, line 8, at end insert—

'Restriction of interest on repayment of tax resulting from carry
back of relievable tax

25A.—(1) Amend section 826 of the Taxes Act 1988 as follows.

(2) After subsection (7B) insert—

"(7BB) Subject to subsection (7BC) below, in any case where—
(a) within the meaning of section 806D, any relievable underlying tax or relievable withholding tax arises in an accounting period of a company ("the later period"),
(b) pursuant to a claim under section 806G, the whole or any part of that tax is treated as mentioned in section 806D(4)(c) or (5)(c) in relation to the single related dividend or the single unrelated dividend arising in an earlier accounting period ("the earlier period"), and
(c) a repayment falls to be made of corporation tax paid for the earlier period or of income tax in respect of a payment received by the company in that period,
then, in determining the amount of interest (if any) payable under this section on the repayment referred to in paragraph (c) above, no account shall be taken of so much of the amount of the repayment as falls to be made as a result of the claim under section 806G, except so far as concerns interest for any time after the date on which any corporation tax for the later period became due and payable (as mentioned in subsection (7D) below).

(7BC) Where, in a case falling within subsection (7A)(a) and (b) above—
(a) as a result of the claim under section 393A(1), an amount or increased amount of eligible unrelieved foreign tax arises for the purposes of section 806A(1), and
(b) pursuant to a claim under section 806G, the whole or any part of an amount of relievable underlying tax or relievable withholding tax is treated as mentioned in section 806D(4)(c) or (5)(c) in relation to the single related dividend or the single unrelated dividend arising in an accounting period before the earlier period,
then subsection (7BB) above shall have effect in relation to the claim under section 806G as if the reference in the words after paragraph (c) to the later period within the meaning of that subsection were a reference to the period which, in relation to the claim under section 393A(1), would be the later period for the purposes of subsection (7A) above."

(3) In subsection (7D) (date on which corporation tax is due and payable for the purposes of certain provisions) after "(7B)" insert (7BB)".

(4) In subsection (7E) (which, for the purposes of certain provisions, restricts the power in section 59A of the Taxes Management Act 1970 to alter the date on which corporation tax is due and payable) after "(7B), ", in both places where it occurs, insert "(7BB),".'.— [Mr. Dowd.]

Clause 104

CONTROLLED FOREIGN COMPANIES.

Mr. Flight: I beg to move amendment No. 14, in page 72, line 23, leave out clause 104.

Mr. Deputy Speaker: With this it will be convenient to discuss the following: Amendment No. 15, in schedule 31, page 532, line 3, leave out schedule 31.
Government amendment No. 91.

Mr. Flight: We believe that there are some major deficiencies in the schedule, which we did not address in Committee.

Mr. Letwin: The charade that we have just witnessed is necessitated by the fact that I must declare an interest. Again, I am not quite clear which, but I am sure that there will be one. Therefore, I am prohibited by the rules of advocacy from moving the amendment. I do not know what relationship my interests have to schedule 31. However, the rules of the House do not let one speculate, so we will, as always, play by the rules.
We did not discuss schedule 31 in Committee and the sole responsibility for that lamentable fact lies with me. I was so concerned with schedule 30 that I did not notice that schedule 31 was on the agenda and failed to leap up in time. However, nothing much has been lost, because the right answer on Report is the same as the right answer would have been in Committee, which is that schedule 31 needs to be no part of this Bill. It is radically misconceived and the Government have just as good an opportunity to remedy it now by accepting the amendment to delete it as they would have had in Committee.
I want to put on the record two critical points. The first is that the Conservative party has no truck whatever with the idea of people being able to construct arrangements for avoiding tax out of controlled foreign companies as a way of going about something quite other than trading business. That is the reason why we introduced controlled foreign companies provisions 16 years ago. There is nothing between us and the Government on the general principle that where a UK company seeks to engage in Bermuda cashbox activities or the like with a straightforward controlled foreign company, that needs to be stopped. The whole purpose of CFC legislation is to stop it. So far, so good.
The second point is that, unfortunately, this is an area of great delicacy and complexity, involving a huge range of different transactions. As a consequence, it is extraordinarily difficult to disentangle entirely legitimate business manoeuvres from tax avoidance manoeuvres. I do not hold it against Ministers or officials that they have made a muck-up of schedule 31 because it is difficult to separate the two matters. However, the fact is that they have made a muck-up of it and, as a consequence, it needs to be withdrawn. That is not to say that some better constructed analogue of it could not come forward next year and do some good in the service of the British taxpayer. This, however, is not that analogue. It is a schedule that does some very wrong things—albeit, I think, unintentionally.
I think that the Paymaster General is aware of some of those things, but she may not be aware of all of them. If she is aware of all of them, I apologise for going through them rather laboriously; but as, if she is aware of them, she should have done something about them, I think I can be forgiven for assuming that she is not. That is the only charitable explanation for the existence of schedule 31.
I wish to draw attention to two problems in particular. The first is caused by a combination of paragraphs 4 and 8 of the schedule, and relates to the 50:50 joint venture. Let us suppose that there are two corporations, one UK-based and the other US-based, each of which holds an interest of more than 40 per cent. and less than 50.1 per cent. of a joint venture vehicle. If each corporation holds an interest of 50 per cent., both will fall into the category of companies holding an interest of more than 40 per cent. and less than 50.1 per cent., and will therefore be caught in the nexus of paragraphs 4 and 8.
I am sure that the 40 per cent. rule is intended to capture certain nefarious tax-avoidance practices—practices unknown to me but, doubtless, known to the Minister and her officials. I do not doubt that such practices exist; nor do I doubt that we should find ways of dealing with them. The problem is that the Minister, I think unintentionally, will also catch an entirely legitimate set of business practices which I consider particularly important.
Let us imagine that the UK and US companies that I mentioned earlier are involved in internet communications, or telecommunications generally. Let us suppose that they operate on the basis of a joint endeavour to provide major multinational customers with voice telephony or data transfer between the US and the UK, and that—not unnaturally—the UK partner seeks to service the UK-based elements while the US partner seeks to service the US-based elements.
A standard voice telephony call along a straightforward transatlantic cable with indefensible rights of user attached has three components. There is the local and long-distance domestic access within the UK; there is the local and long-distance domestic access within the US, which involves two people, or sets of people, picking up their telephones; and there is the transatlantic component.
A perfectly rational business structure to be used in such circumstances—a structure that may emerge from detailed negotiations in the setting up of a joint venture—may be the holding of three "pick and mix" sets of accounts. One may relate to the part of the pool charge that originates from the UK caller, and represents the resource cost of providing the UK domestic section of the call facilities. Another may relate to the US termination. The third may relate to the transatlantic element—and the transatlantic element may be accounted for through a 50:50 joint venture.
It would be perfectly reasonable for that joint venture to be registered in, for instance, the media. We are not talking about a cash box: there is no intention to stuff the system with earnings from the UK in order to collect tax-free interest. The intention is simply to identify a low-tax jurisdiction, for legitimate taxpaying purposes and as part of a legitimate business structure, in which a 50:50 joint venture can be sensibly located—a venture in which the shared part of the call revenue can be placed, and in which the cost of that shared part will be recognised. In this instance, we are talking about the cost of the IRUs on the transatlantic cable and, perhaps, associated transmission equipment.
I have described an entirely legitimate business practice and an entirely legitimate business structure. I do not know whether such things currently exist, although I speculate that they do, and if they do not they soon will. There are many other such cases, some of which I know exist, from personal experience. All those cases will be captured by the intersection of paragraphs 4 and 8. The joint venture that I have described will be regarded as a controlled foreign company, and that is wrong. The Financial Secretary will smile at this, inwardly or outwardly, but the effect of the provision is irrational. Moreover, it is unintentional. At least, I assume that it is; the Bill cannot have been intended to clobber such legitimate business practices.
That is the first defect of schedule 31. I thought long and hard—and, more importantly, tried to persuade experts to do the same, as my capacities in this respect are distinctly limited—about the possibility of tabling specific amendments to deal with that defect, but I am afraid that it defeated us. I think that the structure of the schedule militates against a solution, and that is my first reason for believing that the schedule should be rewritten.
I am mindful of the fact that, as the hon. Member for Kingston and Surbiton (Mr. Davey) said repeatedly in Committee, we do not want to complicate the situation by tabling "right" amendments on top of "wrong" schedules, ending up with a provision that no one understands. I fear that that would be the very result of trying to weave a solution into schedule 31 as it stands. Surely it would be far better to scrap the schedule, and bring it back next year. The amount that the Government will lose as a result of loopholes they have discovered will not be hugely significant in one year. Over time it may prove important, but I am sure that over time a solution can be found to whatever problems the Paymaster General considers to be real—and arise from tax avoidance manoeuvres—without the need to clobber the joint ventures to which I have referred.
I do not know whether the Paymaster General already knows about the problem that I have identified. As I have said, if she does, she should have killed it already. I shall charitably assume that she does not.

Dawn Primarolo: If the hon. Gentleman looks at the Bill, he will see that the motive test would apply. He has described a situation that revolves around not an intent to avoid tax, but the structure of the joint venture. The motive test, and other exceptions, would exempt a case of non-avoidance.
I do not understand the hon. Gentleman's point. He says that he is against avoidance, but that there are some structures that do not fit the 50:50, 40:40 arrangement. Ours is the only country with the motive test and the other exemptions. If the purpose was not to avoid tax, presumably such structures would be all right.

Mr. Letwin: I hardly dare suggest it, but we may be making progress. If I tell the Paymaster General what I find worrying, perhaps she can lay my fears to rest for Pepper v. Hart purposes.
I freely admit that I only dimly understand how the motive test will be applied by the courts. Indeed, I am not convinced that the great lawyers understand that yet. As I

dimly understand it, however, the test does not distinguish clearly between two things. We need such a distinction here, and if the Minister can make the right statement we may be able to achieve it.
The test does not distinguish clearly between manoeuvres designed purely to avoid tax—I agree that they should be clobbered—and arrangements of the kind I have described. While such arrangements are perfectly legitimate business manoeuvres, an element of them will have been the hope that—through onshore pooling and other legitimate means; by causing the subsidiary to be chosen to be in a low-tax jurisdiction—the net effect would be beneficial. That constitutes tax planning of a legitimate kind, not tax avoidance.
if the Paymaster General is saying that the motive test—not only as she plans it but, much more importantly, as she intends it to apply to this case—would mean that, in the type of circumstances I was describing, that would be regarded not as an avoidance mechanism but as legitimate tax planning, as part of legitimate business activity, I think that we probably do have a solution to this particular problem.

Dawn Primarolo: The motive test has been in place since 1984, when the previous Government introduced it, and has consistently worked perfectly well without the problems that the hon. Gentleman is describing. I assure him that the type of structures that he is identifying are not new ones. He has advanced two arguments, the first of which deals with what would happen if the activity was not avoidance under the 40:40 test. As I told him, the motive test is the key to determining how to deal with the matter.
Secondly, the hon. Gentleman questioned whether the motive test was adequate. As I said, it has been working perfectly well since 1984 and has withstood the test of time. I think that I am right in saying that we use it also in transfer pricing. However, I shall double check on that to ensure that I am correct.
I apologise for making a rather long intervention. Nevertheless, both the hon. Gentleman's points are answered in the legislation.

Mr. Letwin: There is no need to apologise for the length of the intervention. I think—as long as I am thinking straight through the haze of my indisposition—that the Paymaster General is probably saying what needs to be said. We shall later entirely discover. However, I think that she may have succeeded in removing my anxiety on that score.

Dawn Primarolo: I think that we can certainly clear up these points, and it is important that the explanation is on the record. The motive test exempts controlled foreign companies that do not have United Kingdom tax avoidance as one of the main—I emphasis, the main—reasons for their existence or the transaction. I think that we can see a clear audit trail—involving motive, motive test, exemptions and current and past interpretation—that deals with the point that the hon. Gentleman is making. Clearly, CFC legislation takes account of legitimate activity, but—putting it very directly—nails those who are avoiding tax and for whom the CFC exists purely to help them to do that.

Mr. Letwin: If the hon. Lady is putting the emphasis that I think she is putting on the word "mainly", I think


that it probably will capture the case that I was describing and similar cases, and that we probably will have a solution. Therefore, I think that we can probably rest easy on that—although, as I said, time will tell, as we go through the courts and hear how these matters are interpreted. Nevertheless, the hon. Lady's comments were very helpful.

Mr. Edward Davey: I believe that the Paymaster General is right on this point. My only concern with the motive test in the legislation is whether, in the Inland Revenue's examination of a company's motive, there should be an appeal procedure. There is an appeal procedure in other spheres in which the motive test operates. Does the hon. Gentleman think that the absence of such a procedure is a deficiency in the Bill?

Mr. Letwin: I agree with the hon. Gentleman that if the motive test is to have placed on it the weight that the Paymaster General has most helpfully placed on it, it would also be helpful if there were an appeal procedure within the Inland Revenue—as the courts already have one. I certainly agree on that point.
Let us turn to the second problem with schedule 31, which I think that the Paymaster General became aware of at a considerably earlier stage in our deliberations on the Bill. I think that she became aware of it through the representations of one particular company. In Committee, at a certain moment in the discussion of something quite else, the Paymaster General sounded as if she was saying that there was only one company in the whole of the United Kingdom that really was affected in the way that I am about to describe. I think that that was incautious and, in fact, false. Certainly, however, one company has brought to her attention the problem that I am about to bring to her attention. I can only assume that she thinks that the problem is not serious enough to worry about. It is serious enough to worry about.
What is this particular problem? It is the problem of the Swiss-Lux Finance Company being used as part of a structure whose basic intention is not to avoid United Kingdom tax, but to benefit from the tax shield on interest costs of a higher-tax jurisdiction where the subject of an acquisition resides in the higher-tax jurisdiction. Let me try to disentangle that absolutely ghastly sentence.

Dawn Primarolo: I think that I may be able to help the hon. Gentleman to untangle that ghastly sentence. Is he describing the transfer of losses into a country where the losses were not generated, to get the benefit of that country's relief?

Mr. Letwin: In a word, no. I am describing a situation in which a United Kingdom company, as a perfectly ordinary part of its business, acquires a company in another jurisdiction that has a higher corporate tax rate—it is a standard merger and acquisition by one trading company of another trading company; there is no question of any type of sheer financing manoeuvre—and in which it funds that acquisition, as many acquisitions are funded, partially or wholly through debt. Because company A, the United Kingdom company, is the acquirer, it will naturally fund the acquisition through debt raised by itself from its bankers. Therefore, stage 1 of the transaction is that the United Kingdom company—which was previously, for example, debt free—has acquired a huge

lump of debt as a result of raising the money to buy company B in, shall we say, Germany, which has a high corporate tax rate.
So far, there would be nothing between the Paymaster General and the Opposition. Everyone would agree that that is a completely legitimate acquisition activity. It may even lead to the creation of a great United Kingdom company. In fact, there is one instance in recent British history when it has led precisely, as I have described, to the creation of a great United Kingdom trading company.
The next stage of the transaction is that the United Kingdom company in question—having acquired, first, the German subsidiary, and, secondly, the lump of debt in the United Kingdom—wants to find a way of refinancing that debt in the German subsidiary, so that—

Dawn Primarolo: It can transfer losses.

Mr. Letwin: No. We are talking about transferring not losses, but acquisition debt. There is no reason on earth why the United Kingdom tax authorities should object to the transfer of acquisition debt from a United Kingdom acquirer to a subsidiary in a higher-tax jurisdiction. I cannot see any reason at all why that should be something to which the United Kingdom Treasury objects.
I should point out that, if it really is something to which the United Kingdom Treasury and the Paymaster General object, they are signalling to all such potential acquirers in the United Kingdom that they should do reverse takeovers and end up with their headquarters in the higher-tax jurisdiction. I know that the Paymaster General is the chairman of an important—to my mind rather misguided, but, nevertheless, important—committee of the European Union that looks into these things, and I understand that she may have other interests and motives in the matter—which certainly are not illegitimate in any personal sense, but are part of an agenda that the Opposition do not share.
None the less, just dwelling on this particular type of case, I cannot see any United Kingdom interest in trying so to arrange things that, in the circumstance that I have described, the United Kingdom acquirer prefers to have headquarters located in the high-tax jurisdiction by doing a reverse takeover. Such an arrangement would be a great disadvantage to the United Kingdom, its financial institutions, its accountants, its lawyers, its office cleaners and all the rest. It is all part of the same syndrome that we thought we had got over when the Government reversed the double tax relief provisions. What we are all trying to achieve, I hope, is attracting—not repelling—companies from locating their headquarters here.
It is clear to me that I do not need to explain to the Paymaster General—I shall therefore only very briefly explain to the House—that, currently, the manoeuvre of locating acquisition debt in the high-tax jurisdiction subsidiary proceeds by means of having a Swiss-Lux Finance arrangement, whereby the Luxembourg company effectively lends money to the subsidiary in the high-tax jurisdiction and receives interest from it.
That money is then used by the subsidiary to purchase shares in the acquirer so that the acquirer can pay off its UK debt. By those means, the debt is effectively relocated to the high-tax jurisdiction. That manoeuvre will be prevented by schedule 31(7). However, it is not in the interests of the UK to arrange matters so that such a


manoeuvre is illegitimate, because the effect will be to persuade companies to locate their headquarters in the high-tax jurisdictions, which are likely to be other European countries. That cannot be to our national advantage.
Having said all that, I am most preoccupied by the unfairness involved. Although the disadvantages are considerable, they are not as great as in the case of the double tax relief. Schedule 31(7) is an important, but not a catastrophic, mistake. What makes it necessary for us to oppose the provision is the fact that companies have already performed the manoeuvre in the legitimate expectation that it would not be clobbered retrospectively. The least that the Government should do—which would reduce the schedule from being appalling to merely very bad—is to agree that the provisions will not apply retrospectively. People will know in future that they need to plan around the provisions, but to apply them retrospectively is unfair and the Opposition cannot concur to that.
I expect that the Paymaster General has received intensive briefing and clear explanations from at least one company. I happen to know that it is not the only one that will be affected, but it is the only one that has stuck its head above the parapet. The Paymaster General will probably admit—while displaying the same delicacy as I am in not naming the company—that the company is a reputable company. It is not a fly-by-night tax avoidance mechanism, but one of Britain's great trading companies. I disagree with the Paymaster General on many things, but I know that we share the patriotism that means we wish to encourage business to locate here. I cannot think that she wants to send out the message that if companies based in the UK behave in certain ways based on legitimate expectations, they will be retrospectively clobbered by Acts of Parliament. That has not been part of the tradition of our tax legislation and the Paymaster General cannot wish to see it happen now.
if the Paymaster General can tell us, in the same tremendous spirit of co-operation and sympathy that she displayed in relation to earlier problems, that the legislation will not apply retrospectively, for some reason that I have missed, it will at least not be catastrophic, although it will militate against future acquirers locating in the UK. A much better solution would be to redo schedule 31(7) so that it would not have that effect. That is the solution that we seek and the reason why we shall push the amendment to a vote.

Dawn Primarolo: I shall clear up a couple of points before I turn to the issue of acquisition. It was, I believe, the hon. Member for Kingston and Surbiton (Mr. Davey), as well as the hon. Member for West Dorset (Mr. Letwin), who raised the issue of whether the motive test was appealable. The answer is yes. Under self-assessment, it is for companies to assess whether their controlled foreign companies pass the motive test. They have been capable of doing that since 1984, as I explained. If the Inland Revenue disagrees with the self-assessment, it can amend it. As in any other case in which the Inland Revenue

makes such an amendment, the company can appeal against it. The case goes to the commissioners and can then go to the courts.

Mr. Letwin: That is helpful.

Dawn Primarolo: Thus far, but no further. I have a feeling that we will have to agree to disagree on the rest, because we do not accept the amendment. To remove in their entirety the anti-avoidance measures on controlled foreign companies would be crazy. I am a little surprised that the hon. Gentleman suggests doing so because he is otherwise clear on the issues of avoidance. The amendment is reckless and the beneficiaries would be those multinationals which wish to avoid paying their fair share of UK tax. The losers would be the hard-working families of this country and other companies which would face increased taxation or poorer services because of lower tax receipts. I am sure that the hon. Gentleman does not wish to be seen to support the corporate tax scams and wheezes that the amendment would allow.
The hon. Gentleman will be familiar with the opinion in the International Tax Review, which in September 1998 specifically highlighted the fact that the use of the controlled foreign company and exempt international holding companies was
a method of avoiding tax.
Indeed, the article expressed surprise that the arrangements were not being blocked and it was written by none other than the leading accountant at the then Price Waterhouse, which the Opposition have been keen to quote during these debates.
On the issue of acquisition, I shall make a few preliminary points and then deal specifically with debt transfer.
There are four sets of changes in the arrangements for controlled foreign companies, and the point about acquisition is pertinent to the fourth. That change stops the automatic exemption for holding companies from being abused to avoid UK tax on intra-group interests and royalties. As we have discussed, holding companies are generally outside the controlled foreign company rules if at least 90 per cent. of their income comes from companies that meet one or more of the controlled foreign company exemptions.
Generally speaking, that makes sense when the income is a dividend paid out of post-tax profits. There is a logic in saying that, from the point of view of the UK Exchequer, it is largely immaterial whether the post-tax profits of a non-resident subsidiary are held in the subsidiary or in the non-resident holding company. However, the current rules are not restricted to holding companies that receive their income from post-tax profits. They apply equally where the income consists of interest and royalties paid from pre-tax profits. In those circumstances, pre-tax profits are shifted from the subsidiary to the holding company. There is a tax deduction in the subsidiary, and a new source of income in the holding company.
The current exemption distorts the way in which some investments are structured, and is leading to a loss of tax for the UK. Multinational companies use offshore holding companies to extract tax-free profit from overseas subsidiaries. They then keep those profits outside the UK tax net. That is part of the problem that the Government


are dealing with, but I hope that the hon. Member for West Dorset will accept that several relationships are involved.
The Bill will ensure that the automatic exemption for holding companies is passed only when more than 90 per cent. of the holding company's income is received in the form of a dividend that is not tax deductible. The change does not introduce any new principle to the controlled foreign company rules. Other ways of diverting the pre-tax profits of overseas subsidiaries into tax havens and preferential regimes are already covered. The Bill will introduce a logical and coherent set of rules by applying to the holding company exemption the same principles that apply to the rest of the controlled foreign company legislation introduced by the Conservatives in 1984.
It has been suggested that some multinationals—I shall not name them for reasons of taxpayer confidentiality—are using loans from holding companies to reduce foreign tax, rather than UK tax. That is the point that the hon. Member for West Dorset is focusing on, and I hope that he will be happy with what I have to say next. If a company is not seeking to avoid UK tax it will, of course, get through the motive test—end of story. However, holding companies typically use debt finance to reduce both foreign tax and UK tax. It is in those circumstances that the controlled foreign company legislation would bite.
I hope that the hon. Gentleman appreciates the distinction. He said that he does not agree with avoidance of UK tax, and that he was talking about the transfer of debt into foreign jurisdictions. As long as that transfer does not lead to a reduction in UK tax liability, the CFC legislation will not bite.

Mr. Letwin: That is helpful, but although the main purpose of the manoeuvre that we are talking about was to reduce costs through reducing tax in a foreign jurisdiction, the by-product was that tax in the UK was also reduced. Does not the Paymaster General think that it would be wrong retrospectively to clobber people who had made plans based on legitimate expectations regarding the law as it previously existed?

Dawn Primarolo: With respect, I do not understand how the hon. Gentleman can say that the Bill will clobber such people retrospectively. The rules have made it clear that companies could not use controlled foreign companies to reduce their UK tax liability, or to avoid it completely. The Bill proposes amendments to our controlled foreign company legislation because some have sought to circumvent the clear intent of that legislation.
The hon. Member for West Dorset will know that controlled foreign company legislation is used throughout Europe and north America. The UK is the only country in the world that has a motive test, and we recognise that it can be commercially legitimate to use such companies. However, a company that is avoiding its UK tax liability will be caught by the controlled foreign company legislation. I make no apology for that, as such a company should pay to the Government the tax for which it is liable.

Mr. Letwin: I persist in believing that the Paymaster General is missing a point. The fundamental purpose of the manoeuvre that we have been discussing is to obtain

a reduction in the foreign jurisdiction tax by displacing the debt to the subsidiary; in that case, the CFC is being used not to avoid UK tax, but to reduce tax in the other jurisdiction. However, it may be that a by-product is to reduce UK tax liability, and in that case it seems quite unfair retrospectively to deal a blow.

Dawn Primarolo: I do not agree. As we discussed in our previous debate, there has been much comment and many representations on the double taxation relief set out in schedule 30. We have received far fewer observations on the controlled foreign company provisions in schedule 31. Indeed, without breaking any confidences about which companies were involved, it is accurate to say that the majority of companies that made representations on the double taxation relief entirely supported our measures in respect of legislation on CFCs—in fact, some thought that we should go further than we have done. A small number of companies were attempting to use CFC legislation to avoid UK tax, and they have, of course, been quite vocal, but their comments are not representative of the far larger number of companies and professional advisers who have discussed these matters with us. The hon. Gentleman should not expect us to make legislation for the exceptions that attempt to reduce their tax liability in the UK when every other multinational is paying that liability. Therefore, should the hon. Gentleman push his amendment to a vote, I shall ask my hon. Friends to reject it.

Mr. Letwin: Although I appreciate that the Paymaster General is attempting to block off a species of tax avoidance that we agree should be blocked off, she is also blocking off manoeuvres that are perfectly legitimate, and I am bound to say that I persist in believing that she is doing so retrospectively and unfairly. In the circumstances, we shall press the amendment to a vote and I urge my right hon. and hon. Friends to vote against the schedule and in favour of our amendment. I hope that the Paymaster General will reconsider the measure, as she has on double taxation relief, because its long-term effects will be severely deleterious to our industry.

Dawn Primarolo: I shall urge my hon. Friends to support the Government amendments, including Government amendment No. 91, because I am not persuaded by the hon. Gentleman's arguments. We shall not be able to reach agreement on the matter.

Question put, That the amendment be made:—

The House divided: Ayes 120, Noes 344.

Division No. 279]
[8.58 pm


AYES


Ainsworth, Peter (E Surrey)
Chapman, Sir Sydney (Chipping Barnet)


Amess, David



Arbuthnot, Rt Hon James
Chope, Christopher


Baldry, Tony
Clappison, James


Beggs, Roy
Collins, Tim


Bercow, John
Cormack, Sir Patrick


Body, Sir Richard
Cran, James


Bottomley, Peter (Worthing W)
Davies, Quentin (Grantham)


Bottomley, Rt Hon Mrs Virginia
Davis, Rt Hon David (Haltemprice)


Brazier, Julian
Day, Stephen


Brooke, Rt Hon Peter
Donaldson, Jeffrey


Bruce, Ian (S Dorset)
Evans, Nigel


Burns, Simon
Faber, David


Butterfill, John
Fabricant, Michael






Flight, Howard
May, Mrs Theresa


Forth, Rt Hon Eric
Moss, Malcolm


Fox, Dr Liam
Norman, Archie


Garnier, Edward
O'Brien, Stephen (Eddisbury)


Gibb, Nick
Ottaway, Richard


Gill, Christopher
Paice, James


Gillan, Mrs Cheryl
Paterson, Owen


Gorman, Mrs Teresa
Portillo, Rt Hon Michael


Greenway, John
Prior, David


Grieve, Dominic
Randall, John


Gummer, Rt Hon John
Robathan, Andrew


Hague, Rt Hon William
Robertson, Laurence


Hamilton, Rt Hon Sir Archie
Roe, Mrs Marion (Broxbourne)


Hammond, Philip
Rowe, Andrew (Faversham)


Hawkins, Nick
St Aubyn, Nick


Heald, Oliver
Sayeed, Jonathan


Heathcoat-Amory, Rt Hon David
Shephard, Rt Hon Mrs Gillian


Hogg, Rt Hon Douglas
Shepherd, Richard


Horam, John
Simpson, Keith (Mid-Norfolk)


Howarth, Gerald (Aldershot)
Soames, Nicholas


Hunter, Andrew
Spelman, Mrs Caroline


Jack, Rt Hon Michael
Spring, Richard


Jackson, Robert (Wantage)
Stanley, Rt Hon Sir John


Jenkin, Bernard
Steen, Anthony


Johnson Smith,
Streeter, Gary


Rt Hon Sir Geoffrey
Swayne, Desmond


Key, Robert
Syms, Robert


Kirkbride, Miss Julie
Tapsell, Sir Peter


Lait, Mrs Jacqui
Taylor, Ian (Esher& Walton)


Lansley, Andrew
Taylor, John M (Solihull)


Leigh, Edward
Taylor, Sir Teddy


Letwin, Oliver
Townend, John


Lewis, Dr Julian (New Forest E)
Tredinnick, David


Lidington, David
Trend, Michael


Lilley, Rt Hon Peter
Tyrie, Andrew


LIoyd, Rt Hon Sir Peter (Fareham)
Waterson, Nigel


Loughton, Tim
Whitney, Sir Raymond


Luff, Peter
Whittingdale, John


Lyell, Rt Hon Sir Nicholas
Widdecombe, Rt Hon Miss Ann


MacGregor, Rt Hon John
Willetts, David


McIntosh, Miss Anne
Wilshire, David


MacKay, Rt Hon Andrew
Winterton, Mrs Ann (Congleton)


Maclean, Rt Hon David
Winterton, Nicholas (Macclesfield)


McLoughlin, Patrick
Yeo, Tim


Madel, Sir David
Young, Rt Hon Sir George


Malins, Humfrey



Maples, John
Tellers for the Ayes:


Maude, Rt Hon Francis
Mr. Peter Atkinson and


Mawhinney, Rt Hon Sir Brian
Mr. Geoffrey Clifton-Brown




NOES


Abbott, Ms Diane
Blears, Ms Hazel


Adams, Mrs Irene (Paisley N)
Blizzard, Bob


Ainger, Nick
Blunkett, Rt Hon David


Alexander, Douglas
Borrow, David


Allen, Graham
Bradley, Keith (Withington)


Anderson, Donald (Swansea E)
Bradley, Peter (The Wrekin)


Anderson, Janet (Rossendale)
Bradshaw, Ben


Armstrong, Rt Hon Ms Hilary
Brand, Dr Peter


Ashton, Joe
Breed, Colin


Atkins, Charlotte
Brinton, Mrs Helen


Austin, John
Brown, Rt Hon Gordon (Dunfermline E)


Ballard, Jackie



Banks, Tony
Brown, Russell (Dumfries)


Barnes, Harry
Browne, Desmond


Bayley, Hugh
Bruce, Malcolm (Gordon)


Begg, Miss Anne
Buck, Ms Karen


Beith, Rt Hon A J
Burgon, Colin


Bell, Martin (Tatton)
Burnett, John


Bell, Stuart (Middlesbrough)
Burstow, Paul


Benn, Hilary (Leeds C)
Butler, Mrs Christine


Benton, Joe
Caborn, Rt Hon Richard


Bermingham, Gerald
Campbell, Mrs Anne (C'bridge)


Berry, Roger
Campbell, Ronnie (Blyth V)


Best, Harold
Campbell-Savours, Dale


Betts, Clive
Cann, Jamie





Caplin, Ivor
Griffiths, Nigel (Edinburgh S)


Casale, Roger
Griffiths, Win (Bridgend)


Caton, Martin
Grocott, Bruce


Cawsey, Ian
Grogan, John


Chapman, Ben (Wirral S)
Gunnell, John


Chidgey, David
Hall, Mike (Weaver Vale)


Chisholm, Malcolm
Hamilton, Fabian (Leeds NE)


Clapham, Michael
Hancock, Mike


Clark, Rt Hon Dr David (S Shields)
Hanson, David


Clarke, Charles (Norwich S)
Harman, Rt Hon Ms Harriet


Clarke, Eric (Midlothian)
Harvey, Nick


Clarke, Rt Hon Tom (Coatbridge)
Healey, John


Clelland, David
Henderson, Doug (Newcastle N)


Clwyd, Ann
Henderson, Ivan (Harwich)


 Coaker, Vernon
Hepburn, Stephen


Coffey, Ms Ann
Hepburn, Stephen


Cohen, Harry
Heppell, John


Coleman, Iain
Hesford, Stephen


Colman, Tony
Hewitt, Ms Patricia


Connarty, Michael
Hill, Keith


Cooper, Yvette
Hinchliffe, David


Corbett, Robin
Hodge, Ms Margaret


Corston, Jean
Hoey, Kate


Cotter, Brian
Home Robertson, John


Cranston, Ross
Hood, Jimmy


Crausby, David
Hoon, Rt Hon Geoffrey


Cryer, Mrs Ann (Keighley)
Hope, Phil


Cryer, John (Hornchurch)
Hopkins, Kelvin


Cummings, John
Howarth, Alan (Newport E)


Cunningham, Jim (Cov'try S)
Howells, Dr Kim


Curtis-Thomas, Mrs Claire
Hoyle, Lindsay


Dalyell, Tam
Hughes, Kevin (Doncaster N)


Darling, Rt Hon Alistair
Hughes, Simon (Southward N)


Darvill, Keith
Humble, Mrs Joan


Davey, Edward (Kingston)
Hurst, Alan


Davey, Valerie (Bristol W)
Hutton, John


Davies, Rt Hon Denzil (Llanelli)
Iddon, Dr Brian


Davies, Geraint (Croydon C)
Illsley, Eric


Davis, Rt Hon Terry (B'ham Hodge H)
Jackson, Ms Glenda (Hampstead)



Jackson, Helen (Hillsborough)


Dawson, Hilton
Jamieson, David


Dean, Mrs Janet
Jenkins, Brian


Denham, John
Johnson, Miss Melanie (Welwyn Hatfield)


Dismore, Andrew



Dobbin, Jim
Jones, Rt Hon Barry (Alyn)


Dobson, Rt Hon Frank
Jones, Helen (Warrington N)


Doran, Frank
Jones, Ms Jenny (Wolverh'ton SW)


Dunwoody, Mrs Gwyneth



Eagle, Angela (Wallasey)
Jones, Dr Lynne (Selly Oak)


Eagle, Maria (L'pool Garston)
Jones, Martyn (Clwyd S)


Edwards, Huw
Keeble, Ms Sally


Efford, Clive
Keen, Alan (Feltham & Heston)


Ellman, Mrs Louise
Keen, Ann (Brentford & Isleworth)


Ennis, Jeff
Keetch, Paul


Ewing, Mrs Margaret
Kemp, Fraser


Fearn, Ronnie
Khabra, Piara S


Fisher, Mark
Kilfoyle, Peter


Fitzpatrick, Jim
King, Andy (Rugby & Kenilworth)


Fitzsimons, Mrs Lorna
Kirkwood, Archy


Flint, Caroline
Kumar Dr Ashok


Flynn, Paul
Ladyman, Dr Stephen


Follett, Barbara



Foster, Don (Bath)
Lammy, David


Fyfe, Maria
Lawrence, Mrs Jackie


Galloway, George
Laxton, Bob


Gardiner, Barry
Lepper, David


George, Andrew (St Ives)
Leslie, Christopher


George, Bruce (Walsall S)
Levitt, Tom


Gibson, Dr Ian
Lewis, Ivan (Bury S)


Gilroy, Mrs Linda
Lewis, Terry (Worsley)


Godsiff, Roger
Liddell, Rt Hon Mrs Helen


Goggins, Paul
Linton, Martin


Golding, Mrs Llin
Lloyd, Tony (Manchester C)


Gordon, Mrs Eileen
Love, Andrew


Gorrie, Donald
McAllion, John


Griffiths, Jane (Reading E)
McAvoy, Thomas






McCabe, Steve
Ruddock, Joan


McCartney, Rt Hon Ian (Makerfield)
Russell, Bob (Colchester)



Russell, Ms Christine (Chester)


McDonagh, Siobhain
Ryan, Ms Joan


Macdonald, Calum
Salmond, Alex


McDonnell, John
Salter, Martin


McFall, John
Sanders, Adrian


McGuire, Mrs Anne
Sarwar, Mohammad


McIsaac, Shona
Savidge, Malcolm


McKenna, Mrs Rosemary
Sedgemore, Brian


Mackinlay, Andrew
Shipley, Ms Debra


McNamara, Kevin
Simpson, Alan (Nottingham S)


McNulty, Tony
Skinner, Dennis


MacShane, Denis
Smith, Rt Hon Andrew (Oxford E)


Mactaggart, Fiona
Smith, Angela (Basildon)


McWalter, Tony
Smith, Miss Geraldine (Morecambe & Lunesdale)


McWilliam, John



Mahon, Mrs Alice
Smith, Jacqui (Redditch)


Marsden, Gordon (Blackpool S)
Smith, John (Glamorgan)



Smith, Llew (Blaenau Gwent)


Marshall, David (Shettleston)
Smith Sir Robert (W Ab'd'ns)


Marshall, Jim (Leicester S)
Snape, Peter


Marshall-Andrews, Robert
Soley, Clive


Martlew, Eric
Southworth, Ms Helen


Meacher, Rt Hon Michael
Squire, Ms Rachel


Meale, Alan
Starkey, Dr Phyllis


Merron, Gillian
Steinberg, Gerry


Michie, Bill (Shef'ld Heeley)
Stevenson, George


Michie, Mrs Ray (Argyll & Bute)
Stewart, David (Inverness E)


Miller, Andrew
Stewart, Ian (Eccles)


Mitchell, Austin
Stinchcombe, Paul


Moffatt, Laura
Stoate, Dr Howard


Moore, Michael
Strang, Rt Hon Dr Gavin


Morgan, Alasdair (Galloway)
Stringer, Graham


Morgan, Ms Julie (Cardiff N)
Stuart, Ms Gisela


Morley, Elliot
Stunell, Andrew


Morris, Rt Hon Ms Estelle (B'ham Yardley)
Sutcliffe, Gerry



Taylor, Rt Hon Mrs Ann (Dewsbury)


Morris, Rt Hon Sir John (Aberavon)




Taylor, Ms Dari (Stockton S)


Mountford, Kali
Taylor, David (NW Leics)


Mullin, Chris
Thomas, Gareth R (Harrow W)


Murphy, Jim (Eastwood)
Thomas, Simon (Ceredigion)


Naysmith, Dr Doug
Timms, Stephen


Oaten, Mark
Tipping, Paddy


O'Brien, Bill (Normanton)
Todd, Mark


O'Hara, Eddie
Tonge, Dr Jenny


Olner, Bill
Touhig, Don


O'Neill, Martin
Trickett, Jon


Öpik, Lembit
Truswell, Paul


Organ, Mrs Diana
Turner, Dennis (Wolverh'ton SE)


Osborne, Ms Sandra
Turner, Dr George (NW Norfolk)


Pearson, Ian
Turner, Neil (Wigan)


Pendry, Tom
Twigg, Derek (Halton)


Pickthall, Colin
Tyler, Paul


Pond, Chris
Tynan, Bill


Pound, Stephen
Vaz, Keith


Powell, Sir Raymond
Vis, Dr Rudi


Prentice, Gordon (Pendle)
Walley, Ms Joan


Prescott, Rt Hon John
Wareing, Robert N


Primarolo, Dawn
Watts, David


Prosser, Gwyn
Webb, Steve


Purchase, Ken
Welsh, Andrew


Quin, Rt Hon Ms Joyce
White, Brian


Quinn, Lawrie
Whitehead, Dr Alan


Rammell, Bill
Wicks, Malcolm


Rapson, Syd
Williams, Rt Hon Alan(Swansea W)


Reid, Rt Hon Dr John (Hamilton N)



Rendel, David
Williams, Alan W (E Carmarthen)


Rogers, Allan
Willis, Phil


Rooker, Rt Hon Jeff
Winnick, David


Rooney, Terry
Winterton, Ms Rosie (Doncaster C)


Ross, Ernie (Dundee W)
Woodward, Shaun


Roy, Frank
Woolas, Phil


Ruane, Chris
Worthington, Tony



Wray, James



Wright, Anthony D (Gt Yarmouth)
Tellers for the Noes:


Wright, Tony (Cannock)
Mr. Robert Ainsworth and


Wyatt, Derek
Mr. Jim Dowd.

Question accordingly negatived.

Amendment made: No. 91, in page 533, line 43, leave out "(3)" and insert "(4)".—[Mr. Jamieson.]

Clause 106

FOREIGN EXCHANGE GAINS AND LOSSES: USE OF LOCAL CURRENCY

Mr. Flight: I beg to move amendment No. 155, in page 77, line 11, leave out clause 106.
This is a probing amendment. We have been approached by the Chartered Institute of Taxation and the Law Society, which are still concerned about the wide scope of the wording of proposed new section 135A of the Finance Act 1993. In their opinion, the new provision is still capable of catching many companies that prepare their accounts in foreign currency for perfectly normal, commercial reasons rather than because of tax factors.
Both organisations expressed the concern that the test remains an expected main benefit test as opposed to a purpose test. The question posed is what is the main benefit that might be expected to accrue from exchange gains having to be computed for tax purposes by reference to a particular currency, rather than the relevant question as to what is the main benefit that might be expected to accrue from drawing up commercial accounts in a particular currency. The expected benefits of a transaction is the expected result, whereas a purpose test is a motive test.
A company's motive in choosing to use a particular reporting currency might have been to avoid exchange fluctuations where the majority of its assets or liabilities are denominated in that currency, but, applying the proposed new section 135A, it may be possible to conclude that the expected main benefit of using the currency was that the company would avoid realising an exchange gain under the foreign exchange legislation.
9.15 pm
The key concerns about this anti-avoidance provision are whether wider commercial factors can be taken into account and at which time the expected main benefit test is to be applied. Those issues exercised the institute and the Law Society; both expressed concern that the new test could catch a large number of the investment companies that the reforms in clauses 106 and 107 are introduced to assist.
Will the Minister offer assurances that commercial factors can be taken into account, and that the expected benefit is to be judged at the time when a company first prepares its accounts in foreign currency? Will she also confirm that the provisions of the section will not apply when a company is preparing its accounts in foreign currency, in accordance with normal accounting practice, in order to avoid its results being distorted by exchange rate fluctuations? The current provisions are widely drawn, and it would be most welcome and helpful if the Minister would give us a clear statement on the cases to which the anti-avoidance provision might be applied.

Dawn Primarolo: The amendment would remove clause 106. That clause contains several provisions to


support changes introduced by clause 105 to improve the tax system for international companies. Those changes have been widely welcomed because they will make the United Kingdom a more attractive base for international companies.
As those supporting measures are necessary to enable the new system to fit in with the existing law, I realise that the Opposition's attempt to drop the whole clause is not serious. Indeed, the hon. Member for Arundel and South Downs (Mr. Flight) admitted that the amendment is a probing one, and that the real concern is about the part of clause 106 that deals with the new anti-avoidance measures in the clause: the new section 135A of the Finance Act 1993, designed to stop the new rules established under clause 105 being exploited to avoid tax.
As the hon. Gentleman knows, the effect of section 135A is to undo the application of the new rules where the main benefit that might be expected to accrue to a company from using a particular currency in its accounts is that a taxable currency gain would not be recognised. In Committee, the Government made it clear that the rule will apply only where net exchange gains would be cancelled out. That demonstrates that we are interested in the overall position of the company and not in the effect of individual transactions considered in isolation.
The hon. Gentleman continues to express concerns about the scope of the rule, however, so I shall try to reassure him with some comments that I prepared earlier—as they say on "Blue Peter". These comments will also cover points of interest to others who read our proceedings.
Let me emphasise first that the new rule is intended to catch avoidance. It is not aimed at any particular type of company or business, but seeks to ensure that the new system of calculating tax, based on a company's accounts, cannot be abused to avoid tax. So trading companies and investment companies conducting their business in a normal, commercial way will not be affected. The point of the test is to establish whether the main benefit that might be expected to accrue to a company from the structuring and accounting of assets and liabilities in a particular currency is that a net exchange gain would be avoided.
The wording of the test allows for commercial considerations to be taken into account. For example, even if the currency adopted in the company's accounts was particularly weak or strong, if it made commercial sense to use that particular currency and the company's assets and liabilities in that currency were broadly matched, no net exchange gains would have been expected to have been avoided, and the section would not apply.
Where a net gain has been avoided, the test would still be whether the main benefit from using the currency was the furtherance of the commercial purposes of the company or the avoidance of that exchange gain. The Government believe that a company will normally be able to judge whether it would pass or fail this test. In particular, a company will know whether the decision to account in a particular currency makes commercial sense or whether the structuring and accounting of the company's affairs has been skewed to avoid generating taxable exchange gains.
To conclude, let me reiterate that the new rule is intended to tackle avoidance. It will not affect legitimate business undertaken by any company, whether that company is a trading company or an investment company. However, it will affect companies that aim to exploit the new rules for a tax benefit.
I hope that those remarks clarify the scope of the provision and give the hon. Gentleman some of the reassurances that he and others seek on the implementation of the clause. The Inland Revenue will also be providing some written guidance on how the provision will be applied. Given this clarification, perhaps the hon. Gentleman will now feel able to withdraw his amendment. It is only regrettable that we did not have an opportunity to cover these points more fully in Committee.

Mr. Flight: I thank the Paymaster General for her helpful comments. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 107

OVERSEAS LIFE ASSURANCE BUSINESS

Miss Melanie Johnson: I beg to move amendment No. 64, in page 79, line 29, leave out from beginning to "an" in line 30 and insert "Where".

Mr. Deputy Speaker: With this it will be convenient to discuss the following: Government amendments Nos. 65 to 67.
Amendment No. 152, in page 80, line 4, leave out—
'such descriptions of general insurer as may be prescribed:'
and insert ";
(i) such descriptions of general insurer as may be prescribed: or
(ii) a general insurer who elects to be subject to an arrangement prescribed in regulations which appear to the Board to be appropriate;'.
Government amendments Nos. 68 to 70.
Amendment No. 153, in page 80, line 10, leave out "prescribed" and insert "commercial".
Amendment No. 154, in page 80, line 10, after "rate", insert "or rates".
Government amendments Nos. 71 to 77.

Miss Johnson: Clause 107 deals with tax deductions for general insurance reserves and introduces the principle of discounting. It consists mainly of regulation-making powers, and this use of regulations has allowed for consultation with the insurance industry, which has been undertaken, and which good continues—to good effect. The amendments will allow regulations made under the clause to incorporate a change to the original proposals which was suggested in the course of consultation.
In order to explain the amendments, I will briefly explain the effect of the clause. Regulations made under the clause will introduce a process of recalculation of the tax deduction for a year. If it turns out that the tax deduction exceeded a discounted value of actual costs, additions will be made to taxable profits. The additions


will be calculated like interest charges, so the effect will be to charge interest on tax that has been delayed because tax deductions have been too large.
This leads to the question of what should happen if it turns out that a deduction was too low. It is right that this situation should be recognised, alongside the case where a deduction is too high. If a deduction was too low, an amount of interest will also be calculated and it will be given as a tax relief for the insurer.
The consultation paper for the secondary legislation proposed allowing this relief only against interest additions made under the clause, and only in the same year or a later year. In Committee, I agreed that this relief should be made more widely available than was originally proposed, and suggested two options—that relief be available against all trading profits, or that it should be available to carry back to an earlier year.
Industry representatives have suggested that the two options should be combined, with a general right of set-off in the same year, combined with a limited right of set-off in an earlier year. Of the two options, their preference was for an unlimited set-off in the same year. The amendments to the clause will make this change, by providing that interest on overpaid tax will take the form of additional trade expenses. The expenses will be available in the normal way against all taxable profits arising in the same year. If they create a loss, there will be the usual one-year loss relief carry-back.
The amended clause also leaves open the possibility of a limited form of carry-back of relief to an earlier year. This is, however, a matter for secondary legislation, and will be decided following further consultation, along with other matters of detail.
The amendments create an even-handed approach in the way the clause deals with overpayments and underpayments of tax. In this way, the clause will ensure that the tax outcomes are fair to the Exchequer and fair to insurance companies.

Mr. Michael Jack: When we discussed this in Committee, concern was expressed that the clause as originally drafted would disadvantage UK insurance companies in comparison with world competitors because of the global nature of the insurance market. In the discussions that were subsequently held with the industry, did the Economic Secretary receive positive assurances from the industry that the amendments addressed the competition issue to its satisfaction?

Miss Johnson: Many countries, including the United States, Canada, Australia and Germany, already require discounting for tax purposes. France has rules very similar to our proposals to counter over-reserving. The UK has the lowest rates of corporation tax of any major industrialised nation. The long-term costs of the clause to the industry will be far less than the cost of typical European corporate tax rates, which are about 10 per cent. higher than in the UK. The cost is also much less than the industry would pay if insurance premium tax were increased to typical European rates. Our rates are well under European rates.
Companies can choose to base their tax deductions on discounted liabilities. That will cost them more in the short term, but it will reduce or eliminate their long-term costs. They can choose to do that all at once, or to spread

the costs over several years. Therefore, the clause will not produce a competitive disadvantage for UK insurers. I hope that that answers the right hon. Gentleman's question.

Mr. John Greenway: I beg the Paymaster General to revisit what she has said because companies do not pay insurance premium tax; consumers do. If I am lucky enough to catch your eye, Mr. Deputy Speaker, I shall acknowledge that the current provision represents a significant improvement on the original proposal. However, such issues are still not entirely resolved to the satisfaction of those of us who are concerned about the continuing competitiveness of the UK insurance industry.

Miss Johnson: The point that the hon. Gentleman makes about insurance premium tax is correct. Nevertheless, if we were to raise the rate of insurance premium tax, he would say that that would, in effect, cost the companies money, or that the cost would be passed on to the consumer. The cost is not lost depending on the point at which it enters or leaves the system; it affects the entire system. That point would always be made in such circumstances.
On the general principle of such discounting, there is an increasing acceptance that the proposal represents the right way to proceed. In Committee, I put on record the joint response to the proposal of the International Accounting Standards Committee. Perhaps it is worth while briefly reminding hon. Members of that comment on discounting.
The IASC's steering committee concluded that the use of the present value in measuring general insurance claim liabilities is consistent with the emphasis on information that is relevant and decision-useful. A claim that is payable within one month imposes a higher economic burden than a claim for a similar amount that is paid two years in the future. The use of present value allows financial statements to provide information that differentiates those claims from each other. The steering committee found no basis to exempt general insurance claim liabilities from the present value measurement. That was not a lone voice, as was suggested in Committee.
The IASC's view has been widely endorsed by UK accountants, actuaries and companies. There has been a joint response to the proposals on insurance accounting from the Institute of Chartered Accountants in England and Wales, the Institute of Chartered Accountants in Scotland, the Faculty of Actuaries in Scotland, the Institute of Actuaries and the Association of British Insurers. Their joint comment on discounting was simple. They agree that the use of present value in measuring general insurance claims is appropriate. That is the key issue.
Our large insurance companies agreed with that view. CGNU expressed support for the joint response, and Royal and Sun Alliance commented:
We do not think there is any argument for not discounting general business under a fair value basis of measurement of liabilities.
There is overwhelming support for the principle of discounting. That is at issue here, and the matter is being dealt with even-handedly in response to those representations.
9.30 pm
I appreciate that the hon. Member for Arundel and South Downs (Mr. Flight) has not yet spoken to his amendments, but perhaps I might comment briefly. Amendment No. 152 would allow companies to elect to reduce their tax deductions to a discounted best estimate of liabilities, creating what has been called a safe harbour. In return, a company that so elected would be given immunity from later interest charges. However, that change would not sit well with the other provisions in clause 107, which sets out a wholly automatic approach to determining tax liabilities. The clause would not require matters of judgment to be decided on or argued about between the insurance company and the Inland Revenue. I could go into much more detail in response to whatever points the hon. Gentleman makes, but the amendment would add an element that could be disputed. I suggest that it might be subject to considerable legal activity, which would probably not benefit anyone except the lawyers.
Under amendment No. 153, the discount rate would not be prescribed by secondary legislation. Indeed, it suggests that the legislation should merely specify that the discount rate should be the "commercial" rate. That seems to be a recipe for disagreement. Requiring that the rate be commercial is not good enough properly to describe what is needed and companies, tax inspectors and the courts would have insufficient guidance. To avoid ambiguity, the rate must be prescribed in secondary legislation. Perhaps a commitment is being sought that the discount rate will include an allowance for risk. I await clarification. I gave such a commitment in Committee, but, if that is the issue, I am pleased to do so again and reassure Conservative Members that it holds just as true.

Mr. Jack: The Minister said that an allowance for risk would be made, which is an important point. Will she be kind enough to develop that by saying how the amount is to be calculated?

Miss Johnson: The allowance for risk in the discounting calculation could be made either by including a margin for error in the undiscounted value and then discounting the result, or by including an allowance for risk in the discounted rate. There may be some combination of the two. If the legislation did no more than specify that the discount rate should include commercial allowance for risk, that would be ambiguous. It would not specify the commercial purpose, as is suggested by a commercial allowance for risk, nor would it deal with the related question of the margin for error. The proper allowance for risk will be prescribed in secondary legislation, along with the determination of a proper margin for error and other matters of detail. Draft regulations will be made available for comment at the appropriate time.

Mr. Jack: The Minister says that the question of risk will be the subject of secondary legislation. Will she give an assurance that the insurance industry will be consulted on the legislation's detailed points so that it may have an input?

Miss Johnson: I have no difficulty in giving the right hon. Gentleman that assurance as we want to achieve

legislation that is workable and right. I have given a commitment on the discount rate and the way in which it will be considered.
Amendment No. 154 would insert "or rates" alongside the reference to a discount rate. The amendment is not necessary, but perhaps clarification is being sought and I hope to provide it. I can confirm that clause 107 would allow secondary legislation to specify different rates for different types of business. For example, it would allow discounting to proceed according to a non-sterling rate when the liabilities were denominated in another currency. In view of those assurances, I trust that the amendment will be withdrawn.

Mr. Flight: I begin by welcoming the Government amendments and the concessions. Despite those, the industry still feels that clause 107 is damaging to UK competitiveness and, ultimately, not worth the candle of the revenue that it will generate.
The amendments are to permit insurers to treat the negative adjustments arising from under-reserving as expenses of the trade. Those are welcome. The Revenue has also indicated that, if the negative adjustment remains unrelieved, it should be allowed to be carried back against previous positives. It has suggested that subsection (5)(c)(i) and (ii) as amended permits that. It would be helpful if the Minister confirmed that understanding in responding.
What is particularly welcome is that the recognition of risk in the discounting calculation will be on a commercial basis. As well as the references made by the Minister, I mention her letter to my hon. Friend the Member for Ryedale (Mr. Greenway). It states:
I agree that the discounting calculation should proceed on a commercial basis, which is why I gave a commitment during the debate that the discount would include a risk margin.
I take a few minutes to put on the record a summary of why the industry is still not happy with clause 107 and remains opposed to it in principle. As we know, the clause introduces both discounting and a retrospective recalculation regime for tax purposes for insurers. The proposals create a harsher regime than those applicable to other UK companies, even after the concessions and amendments that have been announced.
Unlike other UK companies, insurers are required to compute claim provisions on the basis of 100 per cent. accuracy, with interest charges where that is not achieved. The Revenue's initial proposals were to allow a small—some 5 per cent.—margin of tolerance. The Revenue has indicated that that margin may not be necessary on the basis of the discount rate taking account of risk, but the industry continues to believe that the discount rate and the margin achieve different, although connected, objectives and that the margin should remain.
The insurance industry, unlike other businesses, will be taxed on its liabilities, which is different from being taxed on its accounts, and required to discount in all circumstances. In our view, the proposals remain harsher than the rules on discounting applying to other insurance markets. Indeed, many other businesses—banking in particular—make reserves, but have no requirement to discount. However, the proposals are harsher in the sense that the ability to write insurance cross-border in European insurance markets and the developments in telephone and e-commerce mean that insurers in other


European Union member states must be seen as domestic competitors not subject to these measures, which will apply to UK-based insurers.
While the Government have argued correctly that UK corporation tax rates are among the lowest in Europe, there is a general move to lower company taxation in Europe. As the Government know, Ireland is the main threat to the UK industry; it is rapidly expanding its financial services and the insurance sector, which has not introduced discounting, and it is reducing its corporation tax to 12.5 per cent. as of January 2003.
As was pointed out in Committee, comparisons with insurers in other countries such as the United States are difficult because of the different regulatory rules and more protected domestic markets. The international business, meanwhile, is highly mobile, and the proposals are negative for the continued success of the UK as the centre for both national insurance and reinsurance.
The compliance, regulatory and administrative aspects of the proposals are complex and can lead to uncertainty. They are burdensome and make operating in the UK difficult. The Government have calculated the cost of the proposals to insurers at £250 million, but that does not include the effect on insurers' balance sheets, and therefore the cost of capital.
Under the regime, insurers have two choices: to pay more tax later and recognise a future liability both in their accounts and for regulatory purposes now, or to pay more tax now and set up a deferred tax asset not normally recognised for solvency purposes. With regard to the weakening of the capital base of companies, one leading group estimates that the effect on it will be some £140 million, in line with estimates by other groups.
In summary, despite the Government's welcome attempts to make their proposals more realistic to operate, the proposals are harsh on short-tail business compared with other sectors, and particularly harsh on long-tail, largely international and increasingly mobile lines of insurance, where competitiveness is of the utmost importance.
As the Minister pointed out, our amendment No. 152 is designed to create a safe harbour. Contrary to the hon. Lady's comments, we remain of the view that that is appropriate within the regime that the Government seek to put in place. The amendment would allow insurers to elect for an alternative to the hindsight test in the Government's proposals. The proposed freedom to pay more tax liability will not relieve insurers from the requirement to make retrospective recalculations. Any insurer electing to pay tax earlier can therefore still be subject to prolonged uncertainty about the eventual tax position.
The amendment would allow the industry to explore with the Revenue whether an alternative arrangement might be available as an option. It has been described as a "make your bed and lie on it" approach, and could be based on previous years' experience. The industry's aim is, indeed, to agree a safe harbour arrangement, which would satisfy the Revenue's concerns and protect insurers and pension funds investing in insurance companies from the uncertainty and significant additional compliance costs involved in the retrospective recalculations. Without the amendment, clause 107 would not permit an election for a safe harbour. The amendment permits such an option

to be available if subsequent consultation between the Revenue and the industry shows that arrangement to be feasible.
In amendment No. 153, the intent of the word "commercial" is not, as the Minister suggested, to create a confusing situation, but that the rates prescribed should be commercial which, as the Minister kindly confirmed, is the Government's aim. Amendment No. 154 is designed to seek confirmation that more than one rate of discount could be applied, as different rates are likely to be appropriate to different classes of business. The two amendments aim at the same objective.
In short, although there appear to be those in the Treasury or Revenue who are determined to achieve their long-term objective of shifting to a discounting regime, we do not see that in terms of revenue—the Minister made it clear that the £250 million was the total over time, not a per annum figure—that is worth the candle, compared with the damage, albeit not huge, to the international competitiveness of the industry. If, as seems likely, the Government intend to pursue their objective, we look to them to co-operate with the industry, as they have done, to make their proposed new regime as workable as possible and to minimise the damage to the industry's competitiveness.

Mr. Greenway: It is some time since I spoke on Report on a Finance Bill. As a Front-Bench spokesman with other responsibilities, I felt it convenient and right to leave my right hon. and hon. Friends on the Opposition Front Bench, who have done an admirable job with the Bill, to deal with the issues of the day that arise from the measures that the Government have brought forward in the Finance Bill. However, as the chairman of the all-party group on insurance and financial services, I have been on the receiving end of probably more concerned lobbying on the issue raised by the amendment than any that I can remember for quite some time.
I am happy to remind the House of my interests in the insurance industry.

Mr. Graham Allen (Vice-Chamberlain of Her Majesty's Household): Ah!

Mr. Greenway: None of my interests affects the issue that is before us. The insurance broking and intermediary profession, unlike insurance companies, have no interest. The insurance company interest is the interest of us all because most of our constituents are policy holders with those companies.
I shall make a brief contribution. I do not wish to take up the admirable speech of my hon. Friend the Member for Arundel and South Downs (Mr. Flight), who has handled the issue with his typical expertise. Nor do I wish to deny the Minister gratitude that the Government have been listening to the concerns of the industry. I wish merely to ask, now that we have narrowed the Government's proposals down to the small point that they intend to pursue, whether it is worth while to continue with what is proposed.
If, as the Minister and my hon. Friend the Member for Arundel and South Downs say, the amount of revenue that is to be raised is small, what is the point of potentially


disadvantaging our general insurance industry, which is one of the great earners on our balance of trade? I am talking of invisibles, but they are important.
I hope that I shall make three telling points. First, the regime that is being imposed is both retrospective and harsher in its nature than comparable regimes in other countries within the European Union. The Minister shakes her head, but that is what I am advised. That must mean that there is a competitive disadvantage. The hon. Lady talked about fair value, but the issue is fair competition. No one denies that there are other mechanisms in place in other member states which we do not have. It is understandable that the Treasury wants in some way to balance things up. Revenue has to be raised, and there has to be fairness in so doing. However, I urge the hon. Lady to view these matters on the basis of fairness and competition.
The second and crucial point is that insurance companies will now be taxed, even on what has been agreed so far, on a basis that is different from their accounts. I do not see the logic of that. I again ask the Minister to consider the mischief that the Government are) to deal with.
The third and most important point of all, given that this is not the final stage of the process, is to ask the Minister to continue to be receptive to contributions and consultations from and with the industry on the final outcome of secondary legislation. I understand that some of the features with which the industry remains concerned can be ironed out. We accept that the Government intend to go ahead, and before the night is over the Bill will receive its Third Reading. The Bill will set out the law with which the industry will have to work. I simply plead with the Economic Secretary not to hamper the competitive advantage that our general insurance industry—one of this country's success stories—enjoys because that would inevitably lead to more business moving offshore.
My hon. Friend referred to e-commerce and internet business, and that is a matter for the future. We are dealing with this issue from an historic perspective and not considering how business will be done in the future. The House should ensure that our great insurance industry remains not just competitive, but capable of competing in every market throughout the world and of maintaining its predominant market share in general insurance in this country. That should be our objective.
I understand that, from time to time, we must consider how insurance companies are taxed. However, we must not hamper them in a way that drives business away and allows competitor companies overseas to gain a bigger share of our market than is justified.

Miss Melanie Johnson: So that Opposition Members are clear about the position, let me reiterate what I said in Committee about the costs involved. The hon. Member for Arundel and South Downs (Mr. Flight) remarked on the figure of £250 million. That sum builds up over a 10 or 11-year period and it is the figure per annum from that time.
Hon. Members have referred to fairness. The issue comes down to the fact that the insurance sector uniquely has not had its liabilities discounted previously. That is

unique to the United Kingdom and it means that the sector has obtained its tax deductions on a wholly undiscounted basis.

Mr. Flight: I wish to make two key points on the fact that the industry is apparently unique. First, the banking industry is a greater maker of provisions against bad debts. Those provisions are sometimes inadequate and sometimes too high but, as far as I am aware, they do not need to be discounted. Secondly, it is the normal practice of the insurance industry to discount its own provisions; they are already discounted. In Committee, the Economic Secretary made the point that the data of the Department of Trade and Industry have generally shown a tendency to under-provisioning and not to over-provisioning as a tax avoidance measure.

Miss Johnson: This is getting complicated. I said that the DTI's reports are based on non-discounted reserves, so one cannot draw the conclusions that the hon. Gentleman wants to draw from those reports. I was comparing insurance companies and I said that their position was unique in the UK. At this hour, it is perhaps wise not to start a debate on banking at the same time as a debate on the insurance industry. However, to base tax deductions on the discounted value of liabilities, it is necessary for the tax to move on to a different basis for that account.
The position has been unusual. Although the hon. Gentleman says that, in effect, the companies have discounted in any case, the point is that that has not been a requirement of the system. They have therefore been in an unusual position. He mentioned the way in which the proposals could add significantly to companies' capital requirements on balance sheets However, the clause will give companies a choice and I thought that I had made that point clear. If they wish, they can choose to base their tax deductions on the discounted liabilities. If they do that, they will not be obliged to include any tax liability on their balance sheets through the clause and the amendment. There will be no effect on capital requirements if companies make that choice. If they do not, capital requirements will be affected. However, that is not inevitable.
The hon. Member for Arundel and South Downs also asked for confirmation about the allowance for risk in the discount rate and whether a margin of error would continue to exist. An allowance for risk may be combined with a margin of error. However, two sorts of allowance for risk are related. The existence of a margin of error may therefore have a bearing on the extent of the allowance for risk in the discount rate. It is important to achieve a proper balance in secondary legislation between the different means of recognising risk. There will probably be further discussion with the industry and the Inland Revenue to achieve the right balance. We do not need to determine it today. I hope that that reassures the hon. Gentleman.
Let me revert briefly to safe harbours because I did not argue much of the case on them. I do not believe that the hon. Member for Arundel and South Downs has taken account of a couple of central points. First, a safe harbour depends on the notion of a discounted best estimate. Integral to that notion is some method of determining what constitutes a best estimate. I suggest that that simply moves the question a stage further down the line. It would therefore be a matter of determining the calculation,


which could involve extensive debate between insurance companies, the Inland Revenue and possibly the courts. Tax inspectors in the courts are not well placed to make decisions about insurance reserves. Certainty would not therefore ensue.
Let us consider certainty. Even for, for example, oil rigs and nuclear decommissioning, where matters are uncertain, all the provisions are discounted. There should probably always have been discounting in the insurance industry, too. On safe harbours, there is no way of creating certainty for something that is inherently uncertain, namely the insurance business. Companies accept uncertainty from their business. Nobody is certain about future tax charges. Apart from uncertainty about future business results, there is always the possibility of changes to tax law.
Whenever deductions are made for unpaid liabilities, it inevitably adds to uncertainty about future tax. Some uncertainty is inherent in the insurance business. I do not believe that Conservative amendments would have the intended effect of removing the tax uncertainty. However, they have great potential for litigation. They would increase uncertainty and lead to greatly increased costs for the insurance companies and the Inland Revenue.
I hope that hon. Members accept that the assurances that I have given will be helpful to them and the industry. We have reached greater agreement with the industry through our discussions in the past few weeks. I hope that hon. Members will support the amendment.
Amendment agreed to.
Amendments made: No. 65, in page 79, line 33, leave out "and (b)" and insert—
'(a) subsection (2) below applies if.
No. 66, in page 79, line 35, at end insert—
'and
(b) subsection (2A) below applies if it becomes apparent in such a period that that amount was insufficient.'.
No. 67, in page 79, line 40, at end insert—
'(2A) For the purpose of making good to the general insurer the loss occasioned by the deficiency, an amount calculated by applying, for a prescribed period, a prescribed rate of interest to the amount of the deficiency shall be treated as an expense of the general insurer's trade in computing for tax purposes the profits of that trade for the later period of account.'.
No. 68, in page 80, line 7, leave out "and (2)" and insert "to (2A)".
No. 69, in page 80, line 8, after "excessive" insert "or insufficient".
No. 70, in page 80, line 9, after "excess" insert "or deficiency".
No. 71, in page 80, line 12, leave out "and (2) " and insert "to (2A)".
No. 72, in page 80, line 17, after "receipt" insert "or expense".
No. 73, in page 81, line 39, leave out—
'above is treated as a receipt'
and insert—
'or (2A) above is treated as a receipt or expense'.
No. 74, in page 81, line 47, after "(2)" and insert "or (2A)".
No. 75, in page 82, line 4, leave out "and (2)" and insert "to (2A)".
No. 76, in page 82, line 7, leave out—
'period of account mentioned in paragraph (a) of
and insert—
'first period of account mentioned in'.
No. 77, in page 82, line 9, leave out "paragraph (b) of".—[Mr. Allen.]

Clause 111

PAYMENTS UNDER DEDUCTION OF TAX

Amendments made: No. 78, in page 89, line 35, after "etc)" insert "—
(a) after subsection (2) insert—
"(2A) A declaration under section 48l(5)(k)(i) must contain—
(a) in a case falling within section 481(4)(a), the name and principal residential address of the individual who is beneficially entitled to the interest or, where two or more individuals are so entitled, of each of them;
(b) in a case falling within section 481(4)(b), the name and principal residential address of each of the partners."; and
(b)".
No. 79, in page 89, line 35, at end insert—
'( ) In section 477A of the Taxes Act 1988 (building societies: regulations for deduction of tax), after subsection (2) insert—
(2A) Without prejudice to the generality of subsection (2)(a) above, regulations under subsection (1) above may make provision with respect to the furnishing of information to or by building societies corresponding to any provision that is made by, or may be made under, section 482 with respect to the furnishing of information to or by deposit-takers.".'.—[Dawn Primarolo.]

Clause 122

TRANSFER OF PROPERTY BETWEEN ASSOCIATED COMPANIES: GREAT BRITAIN

Amendments made: No. 108, in page 97, line 13, at end insert—
'(1A) In subsection (2) (instruments on which stamp duty not chargeable) in paragraph (a) for "to another" substitute "("the transferor") to another ("the transferee")".
(1B) In that subsection, after paragraph (b) insert—
unless at the time the instrument is executed arrangements are in existence by virtue of which at that or some later time any person has or could obtain, or any persons together have or could obtain, control of the transferee but not of the transferor.".'.

No. 109, in page 97, leave out lines 23 to 29.

No. 110, in page 97, line 37, at end insert—
'; but this is subject to subsection (5A).
(5A) In determining for the purposes of this section whether a body corporate is the parent of the transferor, paragraphs 5(3) and 5B to 5E of Schedule I8 to the Income and Corporation Taxes Act 1988 shall not apply for the purposes of paragraph (b) or (c) of subsection (2B).'.

No. 111, in page 97, line 38, leave out "subsection (2C)" and insert "this section".

No. 112, in page 97, line 40, leave out "on or".—[Dawn Primarolo.]

Clause 123

TRANSFER OF PROPERTY BETWEEN ASSOCIATED COMPANIES: NORTHERN IRELAND

Amendments made: No. 113, in page 98, line 2, at end insert—
'(1A) After subsection (2) (instruments on which stamp duty not chargeable) insert—
(2A) But this section does not apply to an instrument by virtue of subsection (2)(a) if, at the time the instrument is executed, arrangements are in existence by virtue of which at that or some later time any person has or could obtain, or any persons together have or could obtain, control of the transferee but not of the transferor.".'.

No. 114, in page 98, leave out lines 12 to 18.

No. 115, in page 98, line 26, at end insert—
'; but this is subject to subsection (6A).
(6A) In determining for the purposes of this section whether a body corporate is the parent of the transferor, paragraphs 5(3) and 5B to 5E of Schedule 18 to the Income and Corporation Taxes Act 1988 shall not apply for the purposes of paragraph (b) or (c) of subsection (3AA).'.

No. 116, in page 98, line 27, leave out "subsection (3AAA)" and insert "this section".

No. 117, in page 98, line 29, leave out "on or".—[Dawn Primarolo.]

Clause 124

GRANT OF LEASES ETC BETWEEN ASSOCIATED COMPANIES

Amendments made: No. 118, in page 98, line 31, at end insert—
'(l A) In subsection (1) (stamp duty not chargeable on leases etc) at the end insert the following paragraph—
This subsection is subject to subsection (4A) below.
(1B) After subsection (4) insert—
(4A) An instrument shall not be exempt from stamp duty by virtue of subsection (1) above if at the time the instrument is executed arrangements are in existence by virtue of which at that or some later time any person has or could obtain, or any persons together have or could obtain, control of the lessee but not of the lessor.".'.

No. 119, in page 98, line 41, leave out from beginning to end of line 3 on page 99.

No. 120, in page 99, line 11, at end insert—
'; but this is subject to subsection (10AA).
(10AA) In determining for the purposes of this section whether a body corporate is the parent of the lessor, paragraphs 5(3) and 5B to 5E of Schedule 18 to the Income and Corporation Taxes Act 1988 shall not apply for the purposes of paragraph (b) or (c) of subsection (8) above.'.

No. 121, in page 99, line 12, leave out "subsection (8A)" and insert "this section".

No. 122, in page 99, line 14, leave out "on or".—[Dawn Primarolo.]

Clause 125

FUTURE ISSUES OF STOCK

Amendment made: No. 123, in page 99, line 26, leave out "on or".—[Dawn Primarolo.]

Clause 126

COMPANY ACQUISITION RELIEFS: REDEEMABLE SHARES

Amendment made: No. 124, in page 99, line 41, leave out "on or".—[Dawn Primarolo.]

Clause 127

SURRENDER OF LEASES

Amendment made: No. 125, in page 101, line 17, leave out "on or".—[Dawn Primarolo.]

Clause 132

SUPPLIES TO WHICH REDUCED RATE APPLIES

Amendment made: No. 80, in page 104, line 33, at end insert—
'( ) Subsection (2) does not apply to the amendment made by paragraph 8(5) of that Schedule.
That amendment has effect in relation to supplies made after the day on which this Act is passed.'.—[Dawn Primarolo.]

Schedule 35

VALUE ADDED TAX: CHARGE AT REDUCED RATE

Amendments made: No. 81, in page 543, line 51, at end insert—
'and for "neither of those sub-paragraphs" substitute "none of those paragraphs".'.

No. 82, in page 544, line 26, at end insert—
'(5) After paragraph (e) (which is inserted by sub-paragraph (4) above) insert—
(f) wind turbines;
(g) water turbines."'.[Dawn Primarolo.]

Schedule 40

REPEALS

Amendments made: No. 92, in page 566, line 21, at end insert—


'1992 c. 48.
The Finance (No.2)
In Schedule 6,



Act 1992.
paragraph 3.

No. 93, in page 566, line 29, leave out "that Act" and insert—
'the Taxes Act 1988 and the repeal in Schedule 6 to the Finance (No.2) Act 1992'.

No. 126, in page 571, line 18, at end insert—


'1986 c. 41.
The Finance Act 1986.
In sections 67(9), 70(9), 95(1) and 97(1), the words "and is resident in the United Kingdom" and "and is so resident".'.

No. 127, in page 571, line 23, column 3, at end insert—
'Section (Stamp duty and stamp duty reserve tax: transfers between depositary receipt systems and clearance systems).'.

No. 128, in page 571, line 27, at end insert—
'1A. The repeals in the Finance Act 1986 have effect in Ito cordance with section (Stamp duty and stamp duty reserve tax: transfers between depositary receipt systems and clearance systems)(5) of this Act.'.

No. 129, in page 571, line 28, leave out—
'repeal in section 131 of this Act has effect—
(a) so far as it relates'
and insert 'repeals of sections 131 and (Stamp duty and stamp duty re serve tax: transfers between depositary receipt systems and clearance systems) of this Act have effect—
(a) so far as relating'.

No. 130, in page 571, line 31, leave out "it relates" at id insert—
'relating to stamp duty on instruments other than bearer instruments, in accordance with section 108 of that Act; and
(c) so far as relating'.—[Dawn Primarolo.]

Order for Third Reading read.

10 pm

Dawn Primarolo: I beg to move, That the Bill be now read the Third time.
I say that with great pleasure and true feeling on behalf o f a number of hon. Members who served on the Finance Bill Committee.
This Finance Bill continues to deliver Labour's promises and enacts Budget decisions to deliver opportunity and security for the hard-working families of Britain. Working families are seeing the benefit of that. Thanks to sound economic management, we have been able to cut their taxes. We have brought in not only the working families tax credit and the new lop tax rate but now, in clause 31, we have cut the basic rate of income tax to 22p—its lowest level for nearly 70 years.
By April next year, personal tax and benefit changes in this and previous Budgets will mean that, on average, households will be £460 a year better off and that families With children will, on average, be £850 a year better off. The tax burden on a single-earner family on average warnings with two children will be the lowest since 1972. Coupled with low inflation, low interest rates, low mortgage rates and economic growth, that adds up to a substantial increase in living standards, which is what really matters. For a single-earner family on average earnings with two children, living standards will have risen by more than 10 per cent. during this Parliament.
Our measures will help to achieve our goal that.every child should have the best possible start in life. That is why we have set out in the Budget our ambition to halve child poverty by 2010 and to eliminate it altogether by 2020. The measures introduced so far in this Parliament will lift 1.2 million of Britain's children out of poverty and by next year the Government will be spending an extra £7 billion a year on support for children.
The Finance Bill takes a further step to increase support for children with the introduction in April 2001 of the children's tax credit, which is worth up to £442 a year for a family claiming it. Rising living standards and tackling child poverty will be reinforced by further improvements in public services.
The immediate boost for health in the Budget of £2 billion this year is partly funded by the real increases tobacco duties in clauses 12 to 15. The decision of the

Conservative party not to vote for the tobacco tax on Budget day is another confirmation that their sums do not add up and that they could not deliver Labour's pledges on health and education, as we saw yesterday.
Businesses and jobs will benefit from our commitment to enterprise in the Bill. We have cut main and small business rates of corporation tax to their lowest levels and to the lowest levels of any industrialised economy. The Finance Bill contains a number of measures to promote enterprise and help business: the cuts in capital gains tax in clause 37; the research and development tax in clauses 68 and 69; and the permanent 40 per cent. capital allowances for small and medium-sized enterprises in clause 70. Those provisions especially help manufacturing business.
The new all-employee share ownership plan in clause 47 and the enterprise management incentives in clause 62 help high-risk companies recruit key personnel. The share option provisions in clause 56 and the corporate venture provisions in clause 63 are also important. These measures have been widely welcomed by business, along with the introduction in the Budget of a three-year 100 per cent. capital allowance for investment in information and communications technology equipment and the extra £100 million for the new £1 billion target umbrella fund for enterprise growth across the regions. That is a huge commitment to business success, from a Government who believe that enterprise and economic prosperity can and must go hand in hand with fairness.
Clause 82 introduces an optional ring-fenced regime for so-called tonnage tax, whereby shipping companies can opt to work out taxable profits on the basis of the tonnage of the ships that they operate. That innovation, which follows Lord Alexander's inquiry, is part of the Government's commitment to encouraging the British shipping industry.
As was said earlier, the Budget introduces changes in the corporation tax rules, such as limiting the use of so-called offshore mixer companies to shelter low-taxed foreign profits from UK tax. The new arrangements cap the relief on dividends at 30 per cent., and ensure that no UK tax benefit can be gained from "mixing" in an offshore holding company.
As was also said earlier, the introduction of offshore mixing with a cap of 45 per cent. will benefit companies greatly. For the first time, the UK will allow onshore mixing in non-abusive circumstances. That answers industries' concerns about international competitiveness. The UK will be in a position similar to that of the US, but the UK rules are less complicated and therefore better for business.
The Bill also helps us to meet our international commitments to the environment. Following last year's Budget, it is an important part of the largest package of environmental tax measures to be introduced in the UK. Clause 30 introduces the climate change levy. Clauses 20 to 23 reform vehicle excise duty for cars. Clause 59 fundamentally reforms the company car taxation regime, providing an incentive for low carbon dioxide emissions and removing the perverse incentive for people to clock up business miles to achieve more generous thresholds. Clauses 137 and 138 increase the landfill tax rate, and clarify liability.
The changes in the affordable warmth programme in clause 79, and the reduced rate of VAT on the installation of energy-saving materials and grant-funded installation


of heating systems in clause 132, will help to ensure that pensioners feel the benefit of warmer homes and cheaper fuel bills, as well as the £150 winter allowance. That programme implements the Government's commitment to combat fuel poverty by supporting the installation of energy-efficient heating systems and insulation in up to 1 million low-income homes.
The Bill also does a great deal for charities and charitable giving. It helps communities to become more democratic, more open and more socially inclusive. Clauses 38 to 46 give effect to our radical package of measures to boost donations to charities, and to improve the operation of the tax system for charities. Clause 39 abolishes the minimum limit on tax relief for donations. Clause 138 boosts payroll giving with the three-year 10 per cent. Government supplement, and abolishes the maximum limit on donations. Clause 40 cuts red tape in regard to corporate donations, and clause 43 introduces new income tax relief on gifts of shares and securities. The Bill frees charities from the need to set up subsidiaries for small trading and fundraising ventures, and broadens the VAT zero rate for the sale or hire of donated goods. It is a good package, which has been widely welcomed by charities.
Along with the new children's fund which we announced yesterday—it will have a £450 million budget over three years—these measures point to how we can help our country to make the most of one of our greatest strengths: the readiness of our people to give so much of their time and money to voluntary and community activity, for the benefit of all.
The Bill demonstrates that the Government are working hard for a purpose—to build a Britain that is strong, modern and fair. At last, economic prosperity and fairness are no longer seen as opponents; instead, they are seen as partners in the process of building Britain for the future.
The Bill also demonstrates that, with a Labour Government, there is more enterprise, more opportunity, more fairness and more investment in Britain. Britain is better off with a Labour Government, and I commend the Bill to the House.

Mr. David Heathcoat-Amory: This is not quite the worst Finance Bill that the Government have produced in the past three years, but it comes very close to it. It is certainly easily the longest Finance Bill. It is now a two-volume monster which has grown during our proceedings to 572 pages—most of which raise taxes in one form or another, and all of which make the British tax and benefits system a great deal more complicated.
Contrary to what the Paymaster General has just said, this is a tax-raising and tax-increasing Finance Bill. It comes as the last in a series of tax-raising Budgets. Taken together, this Government's Finance Bills have increased taxes on the hard-working families of Britain by £670 per year each. That is not just damaging to individuals, but involves piling taxes on to the business sector, which in itself undermines the competitive advantage that the previous Government built up during our period in office. The country and the Government will pay dearly for the mistake of eroding those advantages that our firms enjoy in international markets—in which, until fairly recently, they were comparatively lightly taxed and lightly regulated.
The Government's instinct is to tax, to regulate and to intervene. They believe that their decisions are superior to those made by free people and free companies operating in a free market.
This two-volume Bill contains its full quota of stealth taxes. Stamp duty on more expensive properties has quadrupled since the previous general election. The Chancellor is fond of pretending that that increase is borne entirely by the private householder but, in fact, the great majority of stamp duty is paid by businesses. The Government's refusal even to contemplate removing stamp duty from share transactions is again threatening to cause an erosion of business—indeed, a migration of business from this jurisdiction to the continent.
There is another stealth tax that has not been introduced yet, but has been announced. Indeed, we spent many hours debating it in Committee. It is the energy tax, or climate change levy, which the Government now seek to put into law in the Bill and which will come into effect in Apr it 2001. I declare an interest in that I have registrable interests in companies that will pay that tax. I am in fairly good company, however, because every single business of whatever size and in every part of the United Kingdom will pay that energy tax. It will be particularly damaging for the manufacturing sector, and most especially for those companies struggling to earn a living and make a return in international markets.

Mr. Timms: At an earlier stage in our consideration of the Bill, the right hon. Gentleman told the House that the companies in which he has an interest will—like the majority of United Kingdom companies—be better o because of the climate change levy package. Will he confirm that that is the case in the instance of the companies that he is involved in?

Mr. Heathcoat-Amory: No; not for the first time, was misled by the Government. They told me that the sectors in which my companies operate would in fact be better off. On further investigation, however, I am assure' by the management that we—along with most other businesses in the United Kingdom—will be substantially worse off.
What is particularly unfortunate is that the tax, although in the Bill and supposedly in its final form, is still undergoing an evolution. We are told by outside interests and the CBI, for instance, that certain companies will be eligible for rebates of up to 80 per cent., but that man other companies in the intensive energy sector will not The reason for that is truly bizarre. In order to qualify for the rebate, a company has to be part of a polluting industry. It has to be regulated by the integrated pollution prevention and control directive. So a company such as' British Oxygen, which separates air—a highly energy-intensive, but non-polluting operation—will not qualify for the rebates and will have to pay the full tax. British Oxygen operates in an intensely competitive environment and such firms will increasingly invest overseas and not here. At the same time, the Government talk about the need to improve productivity and promote competitiveness. They are good at lecturing other people about such things, but what they do undermines the very competitiveness that they urge on others.
The tax may also fall foul of the European Commission on grounds of state aid. Companies that are negotiating in good faith to try to obtain rebates are uncertain about


whether the whole thing may be torpedoed by the European Commission. The companies have been told that they have to wait until the end of the year before they receive any assurances, and perhaps—even at this late hour—the Government could provide certain assurances. Above all, it is an unnecessary tax. We believe in meeting our Kyoto obligations, just as the previous Government met the Rio convention obligations, but there are many other ways to maintain the downward trend in carbon dioxide emissions, such as voluntary agreements, emissions trading and increased use of gas burning for electricity generation.
The House will recall that IR35 was announced last year, not—typically—by the Chancellor or a Minister at the Dispatch Box, but in the 35th press release put out on Budget day by the Inland Revenue. It amounts to an attack on people who provide services through companies, especially in the high-tech sector that the Government say that they wish to encourage. The Government are obsessed by tax avoidance, but their approach in this case is hitting legitimate businesses that set up companies to help the companies that they serve. They are not avoiding tax and, what is more, they provide the very flexibility in the labour market that the Government say is an asset. The Government criticise other European Union countries for their lack of labour market flexibility, but domestically the Government are piling on more regulation and bringing out more tax measures that undermine that national asset about which they boast.
I turn to the saga of double taxation relief, which has been ably tackled by, among others, my hon. Friend the Member for West Dorset (Mr. Letwin). He spotted early on that the proposal was a tremendous own goal. The Government seem to recognise that we need to be a magnet for overseas investment and business, but in their attack on double taxation relief they are eroding that possibility. Companies based here do not have an advantage, because they are effectively on the same taxation basis as their counterparts in the United States and on the continent. By removing the existing double taxation provisions, the Government will put companies based here at an actual disadvantage compared with those based overseas.
After much bluster, the Government conducted a series of inelegant retreats during consideration of the Bill. First, they postponed the measures until next year. Then they tabled some highly complicated amendments to their own provisions which have gone a long way to reversing the damage and preventing the folly.
However, the damage had been done with the business sector. Last year and the year before, businesses consulted in good faith with the Inland Revenue about how to tackle issues of tax avoidance. The Government ignored that consultation, and brought forward their own clumsy provisions. They ignored the warning signals when they were published.
The Government and the Chief Secretary to the Treasury owe a particular apology to Peter Wyman, a senior partner in PricewaterhouseCoopers, who was the first to point out that the Government had got the matter wrong. Instead, he was insulted by the Chief Secretary, who told the House that the Treasury was entirely right and that the accountancy world had got the matter wrong.
It is now clear that Mr. Wyman was right—and not about that matter alone. One of the first of what has turned out to be a series of leaks from officials at the centre of

government came from Andrew Fraser, head of the Invest in Britain Bureau. A memo from him to the Secretary of State for Trade and Industry found its way into the popular prints. It stated:
We can do better to avoid shooting ourselves in the foot … at a time of real pressures on manufacturing it must make sense to (a) to be careful about the impact of new initiatives—especially from the Treasury and (b) extremely sensitive over their presentation.
Mr. Fraser was referring to three measures—the climate change levy, the imposition of national insurance contributions on share options and the changes to double taxation relief. All of them in their various ways are damaging, and a Government servant told a Minister the truth about that.
In addition, the Bill does nothing to reverse the decline in savings in the economy. The problem is getting worse. When the Conservative Government left office in 1997, the savings ratio—the proportion of national income being saved rather than spent—was 11 per cent. That has fallen in every year since the election—to 7, 5.75, and 5.5 per cent, respectively. In the last quarter, it fell to 3.8 per cent. Yet the Government say that they want to promote self-reliance and long-term savings. They say one thing, but do another.
Finally, I turn to indirect taxes. We debated yesterday at some length the Government's pick-and-choose attitude to indexation and uprating. They uprated pensions by 1.1 per cent., and fuel duty and other indirect taxes by 3.4 per cent. In Committee, we debated the fact that the tax on tobacco has risen relentlessly in every Budget. Those rises represent failures in the Government's health, crime and fiscal policies. The yield from tobacco duty fell last year, so it is just as well that we were not relying on that for national health service funding. Moreover, there has been an explosion in smuggling.
All that was set out in a report that the Government commissioned from Mr. Martin Taylor. Where is that report? It is secret. We are not allowed to see it, even though we paid for it, because Mr. Taylor made the rather obvious observation that it is no good being tough on the crime of smuggling without being tough on the cause of that crime—the large and growing duty differential between Britain and the continent. That is getting worse, and it increases smuggling and encourages criminality. It encourages drink-related crimes, which the Government now say that they are worried about: when drink from smuggled sources is sold in uncontrolled outlets, it increases the danger of criminal behaviour following excessive alcohol consumption.

Mr. Christopher Leslie: Are we hearing a guarantee that the Conservatives will cut tobacco duty?

Mr. Heathcoat-Amory: The hon. Gentleman sounds rather worried, so I invite him to join us in the Lobby to express his concern. The Opposition have voted against those increases in every Finance Bill since the general election. I remind him that, even when we had a Budget deficit, in our last two Budgets we froze duty on alcohol and cut it on spirits precisely because of the problems that I have described. The Labour party entered office and reversed that policy; they increased duty on all those products and made smuggling and racketeering worse. If the hon. Gentleman cares to follow up his concern with a little action, he will have an opportunity to do so shortly.
The abiding impression we have of the Bill is that it is another tax-raising measure; furthermore, it is a measure of almost stupefying complexity. In its excellent publication "Towards a Better Tax System", the Institute of Chartered Accountants in England and Wales gave the Bill marks out of 100 based on the institute's 10 principles of good taxation. The final score was 30. I am tempted to give the same score but, on reflection, I have decided that that would be over-generous. The Bill will continue to annoy and baffle taxpayers for many years after it has become law. We shall vote against it.

Mr. Edward Davey: One hundred and fifty-seven clauses, 40 schedules and 572 pages later, the House should consider striking medals for veterans of the Committee on the Finance Bill. With its complexity and length, the Bill does this country's tax system no good. We are left with the question of whether we should support the Bill's Third Reading, and I suggest that the House applies two tests to find the answer. The first is a cost-benefit analysis of the contents—the Bill contains some good measures, but, as I shall demonstrate, many bad ones as well—and the second is the wider role of the Finance Bill and what it adds or subtracts from the management of the public finances.
As I said, the Bill contains some good measures, albeit small ones: for example, the change to amusement machine licence duty, which is a small measure, but one that will be welcomed in British Legion and nonprofit-making clubs throughout the country, and a measure which my hon. Friend the Member for Twickenham (Dr. Cable) pressed to be included in last year's Finance Bill. Air passenger duty exemptions are likewise welcome to those living in the Scottish highlands and islands. As I told the Financial Secretary in Committee, I hope that the exemption will be extended, for example, to cover the special case of the Scilly Isles, and to ensure that passengers benefit when they arrive at airports in the highlands and islands. Gift aid is also a welcome measure.
A large measure that we support is the climate change levy, although we have had some concerns, which we have expressed in a forthright manner. My hon. Friend the Member for Hazel Grove (Mr. Stunell) moved amendments and spoke on various issues relating to the levy in an effort to improve it. Unfortunately, the Government did not listen, but we decided ultimately to support the schedule's inclusion in the Bill because we believe that, on balance, it is better to have the measure in the Bill than not to have it—it is certainly better than the status quo left by the previous Government.
Those are the good things in the Bill, but, I am sorry to say, there are quite a few negatives.

Ms Rosie Winterton: Will the hon. Gentleman give way?

Mr. Davey: I will not give way. [Interruption.] Perhaps I will give way later.
Fuel duty increases have raised costs for motorists, but have not been offset, as we have advocated, by substantial reductions in vehicle excise duty. The Government have

also failed to sort out the employers' national insurance contributions impost on share options. The most significant negative point, however, is IR35, with which we disagree profoundly. The abuse on which the Government have tried to clamp down is far more narrow than Ministers have made it out to be. Measures to clamp down on tax avoidance could have been more narrowly targeted and far more effective. The way in which the Government have chosen to act means that many small companies in the information technology sector will be seriously hit.
What has concerned us most is that the Government have at no stage admitted that market forces require many small firms—in the IT industry, the oil industry and the engineering consultancy sector—to form limited personal service companies. At no time were the Government prepared— [Interruption.]

Mr. Deputy Speaker (Mr. Michael Lord): Order. Far too many private conversations are going on. I cannot hear the hon. Gentleman.

Mr. Davey: Thank you, Mr. Deputy Speaker.
At no time on Second Reading or in Committee have Ministers acknowledged the fundamental objection to IR35. Many companies are forced into the arrangements that they make by market pressures and by the larger companies. The Government seem unaware of that in spite of all our arguments.
The wider role of the Finance Bill also raises some serious concerns. The Government have said many times that they have not sufficiently increased expenditure on our public services over the first two or three years of this Parliament because they were trying to get the public finances under control. There are three ways in which to do that—increasing taxes, restraining public expenditure and taking benefits from the growth dividend. Over the past few years, tax rises have been introduced and there has been significant growth. Those measures, coupled with tax rises introduced by the Conservative Government, have ensured that the public finances are extremely healthy. No objective observer could say otherwise.
That is why there was no need for the Government to curb public expenditure in their first three years. There have been problems in the health service and a loss of police officers, and our schools have been starved of the funds that they need. The real reason why the Government imposed that public expenditure restraint was that they were trying to build up an election war chest. That was one of the major political reasons for their decision, and that is a great shame given the need in our public services.
A second political reason was that the Government felt the need to convince the City that they could be trusted on public finances. That is their legacy, through no fault of the people who use the public services. They have played politics with our country's public services.
The Government are offering tax cuts in the Bill. There is a penny cut in the basic rate of income tax in clause 31. But that is being done ahead of the huge and very welcome investments in public transport announced in the comprehensive spending review yesterday. Why is income tax being put ahead of investment? The Chancellor talked about deficit reduction. That was necessary, and he is right to point out the mismanagement


of the economy by the Conservative Government. Frankly, however, deficit reduction is becoming almost a fetish for the Chancellor. Why must pensioners wait for an increase in the basic state pension when the Chancellor is using a lot of money to reduce the deficit? He has his priorities wrong.

Ms Rosie Winterton: Is the hon. Gentleman saying that we are taxing the country too little?

Mr. Davey: The Liberal Democrats have often argued that targeted tax increases are necessary for public service investment. The House cannot say that that is a secret.
There is one argument for supporting the Finance Bill and the overall management of the public finances, which is that the Conservatives' proposals are even more ludicrous. They have been saying that the Government's spending proposals are reckless and that spending is getting out of control. Unfortunately, nothing could be further from the truth, and when they look at the facts, the Conservatives will be unable to continue making that point.
In this financial year, total managed public expenditure, as a proportion of GDP, is at a level that has not been seen since 1963–64, so it starts at a low base. At the end of the comprehensive spending review period, 2003–04, it will reach 40.5 per cent. of GDP. In only three years of the Conservatives 18 years in Government was public expenditure as a proportion of national income lower than that. If the Conservatives claim that public spending is out of control, they must acknowledge that it was out of control for 15 of their 18 years.
There is no way that we could support the Conservatives' approach to the management of public finances. The problem, however, with the management in the Finance Bill is that the Government's proposals are too modest and do not put public services first. We shall vote against Third Reading because the Bill puts a tax cut before public service investment and includes an outrageous measure in IR35.

Mr. Jack: At the conclusion of consideration of the longest Finance Bill in history, I would like to put on record my appreciation of the way in which my Front-Bench colleagues have solidly and resolutely attacked and unmasked the Government's tax-raising agenda. They have done it despite all the difficulties that any Opposition face in dealing with highly technical and complex matters, and they have done it with great skill and exposed the truth of the Bill.
It is a pity that when we tried to use modern equipment such as laptop computers in the Standing Committee to assist us in our job of probing the Government, and suggested having the notes on clauses in a modern electronic form, the somewhat arcane rules about what one may or may not bring into a Standing Committee meant that I got my knuckles rapped because I was out of order in bringing in a laptop. I hope that the Chairmen's Panel will consider that matter in due course because we ought now to be allowed to use modern aids further to enhance the ability of the Opposition—and, indeed, right hon. and hon. Members on both sides of the House—to have access to the complex information needed to consider the Bill.
I want to put on record my appreciation of the Inland Revenue for drafting excellent notes on clauses, which helped us to understand the Bill. I wish that the same clarity of explanatory information about the Bill had been available to the Chancellor of the Exchequer yesterday, when I challenged him on the tax burden that results from these measures. In this House, he denied that this country's tax burden is rising. For the record, I point out that in the financial year that ended in April, total Government receipts, excluding the windfall tax, came to 39.6 per cent. of GDP; in the current financial year, that proportion rises to 39.7 per cent., and by the end of the Parliament, it will have reached 39.9 per cent. I wish that the Government had the honesty to admit what their own figures say and what will result from the Bill.
The Bill contains a number of measures on energy saving. As my right hon. and hon. Friends have said, they are too complex and will not work. I make this prediction: the climate change levy will, if the Government continue, be turned into a nice little earner. They say that it is fiscally neutral because of the national insurance rebate, but that claim will go out of the window, as it has with the landfill tax. The Government's increase in that tax did not result in a corresponding decrease in national insurance payments.
The Bill has worsened Britain's international competitiveness, as clauses 103 and 104 bear testament. The Government have taken little note of the impact of that aspect of the measure on their tax policies.
I conclude—[HON. MEMBERS: "Hear, hear."]—on one important point. I am glad to hear the cheers of Labour Members. My right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) and the hon. Member for Kingston and Surbiton (Mr. Davey) pointed out the length and complexity of the Bill.
Even if Treasury Ministers do nothing else in response to what the Opposition have said, they should expand, with immediate effect, the remit of the tax law rewrite project to begin the much needed task of mapping out how we simplify, shorten and improve the operation of our tax system. Every company would welcome that and every citizen certainly deserves it. If the Government want to do something for tax—other than raising it—they should make its operation simpler.

Mr. Alasdair Morgan: I want to make only two points—[HON. MEMBERS: "More, more."] I am tempted to filibuster so that my hon. Friend the Member for Banff and Buchan (Mr. Salmond) will have to begin his Adjournment debate in the early hours of the morning. However, I shall continue.
I suspect that the Government will not take on board my first point. As I pointed out in yesterday's debate on fuel duty, the Government have continued on a course set out by the previous Conservative Government that is detrimental to many people, especially those in rural constituencies such as mine. I regret that the House did not discuss the amendment proposed by my hon. Friends and myself, which suggested that the latest increase in fuel duty, introduced in the Budget, should be suspended until there had been a report on its effect on the Scottish economy and that of the UK.
There is no doubt that fuel duty is one of the major issues affecting the rural economy and the economy at large. The Rural Affairs Committee of the Scottish


Parliament, of which I have the honour to be a member, recently held six or seven hearings throughout rural Scotland—from the far north to the far south—to consider employment prospects. Despite the efforts of the Countryside Alliance to claim that the main issue affecting employment prospects was fox hunting, at all those hearings the foremost issue was fuel tax. The Government make much of targeting benefits on the poorest of society, so it is a matter of deep regret that, at the same time, they are imposing a tax that hits the poorest people in rural society.
I hope that the Government will take on board my second point. It relates to the effects of the climate change levy on medium-sized hydro-electric stations in the north of Scotland. When we debated amendment no. 98 yesterday, the Financial Secretary responded to my speech by noting the concern
about a band of hydro-electric schemes … in the 10 to 25 MW capacity range, that, at some point in the future … may want to carry out refurbishment, and that may well be a point that needs to be considered at that stage.—[Official Report, 18 July 2000; Vol. 354, c. 331.]
I point out to the hon. Gentleman that many such schemes were constructed in the late 1940s and the early 1950s. They have a lifespan of about 50 years, so investment decisions to refurbish them must be taken now. If the Financial Secretary is to reconsider the climate change levy on such stations, it must be done within the next year or so. When he responds to the debate, will he give some consideration to the genuine concerns of the hydro-electric industry in the north of Scotland?

Mr. Timms: In this year's Budget and with yesterday's spending review, my right hon. Friend the Chancellor set out the next steps on the road to a modern and decent Britain, where security and opportunity are open to everybody.
The Bill and the spending review maintain the commitment to stability and prudence, ensuring that we remain on track to meet our fiscal rules and to deliver the steady growth we need. That is why we can make progress and look forward after 18 long years of catastrophic underinvestment in public services under the Tories
In the Budget, we announced sustained increases in resources for improving our public services. As the spending review shows, we are putting in sustained investment to improve standards and deliver modern, responsive services—in health, education, transport, and law and order. What is the Tory response? Some £16 billion worth of cuts.
The Government's aim is for every child to have the best possible start in life. That was clear from what was announced yesterday. That is why we set out in the Budget and in this Bill our ambition to halve child poverty by 2010 and end it altogether by 2020.
We are continuing to ensure fairness for pensioners. This package targets help at the least well off pensioners, while boosting the incomes of those who have managed to put a little aside and do not currently qualify for help.
We are making huge progress towards full employment. The number of people in jobs is at a record level, up by 1 million since the election. Long-term

unemployment is at its lowest for 20 years, and the Bill contains a series of measures to improve things further still. There are action teams to help match people in areas where pockets of high unemployment remain close to vacancies nearby. We are rolling out nationally the new deal for the 50-plus. Employment zones are providing tailored support to around 50,000 long-term unemployed individuals in 15 areas of high unemployment. There is also the cut in the basic rate of income tax. All those measures are promoting employment and moving us further towards full employment.
The platform of stability that we have built is essential for businesses as well. We now have the lowest rates of small business corporation taxes ever—the lowest in the industrialised world. Since 1997, small companies have received an average corporation tax cut of nearly 25 per cent.
We have made further progress on protecting the environment. We have introduced the vehicle excise duty discounts for small-engined cars, the incentive for ultra-low sulphur petrol and a whole range of other important measures.
When growth made a fleeting appearance under the previous Government, their response was reckless and irresponsible. They blew the proceeds of North sea oil and privatisation on current spending instead of investment. We are making sure that that catastrophic mismanagement will not be repeated. We are locking the stability in.
Our prudence over the past three years has been for one purpose and one purpose only—to build a Britain that is decent as well as modern, where, acknowledging that we all depend on each other, we provide opportunity and security for all. The Bill takes us a giant step closer to that goal, and I commend it to the House

Question put, That the Bill be now read the Third time:—

The House divided: Ayes 310, Noes 170.

Division No. 280]
[10.47 pm


AYES


Adams, Mrs Irene (Paisley N)
Bradley, Keith (Withington)


Ainger, Nick
Bradley, Peter (The Wrekin)


Ainsworth. Robert (Cov'try NE)
Bradshaw, Ben


Alexander, Douglas
Brown, Russell (Dumfries)


Allen, Graham
Buck, Ms Karen


Anderson, Donald (Swansea E)
Burgon, Colin


Anderson, Janet (Rossendale)
Butler, Mrs Christine


Armstrong, Rt Hon Ms Hilary
Caborn, Rt Hon Richard


Ashton, Joe
Campbell, Mrs Anne (C'bridge)


Atkins, Charlotte
Campbell-Savours, Dale


Austin, John
Cann, Jamie


Banks, Tony
Caplin, Ivor


Barnes, Harry
Casale, Roger


Bayley, Hugh
Caton, Martin


Beard, Nigel
Cawsey, Ian


Begg, Miss Anne
Chapman, Ben (Wirral S)


Bell, Stuart (Middlesbrough)
Chaytor, David


Benn, Hilary (Leeds C)
Chisholm, Malcolm


Benton, Joe
Clapham, Michael


Bermingham, Gerald
Clark, Rt Hon Dr David (S Shields)


Berry, Roger
Clarke, Charles (Norwich S)


Best, Harold
Clarke, Eric (Midlothian)


Betts, Clive
Clarke, Rt Hon Tom (Coatbridge)


Blackman, Liz
Clelland, David


Blears, Ms Hazel
Clwyd, Ann


Blizzard, Bob
Coaker, Vernon


Boateng, Rt Hon Paul
Coffey, Ms Ann


Borrow, David
Cohen, Harry






Coleman, Iain
Hoon, Rt Hon Geoffrey


Colman, Tony
Hope, Phil


Connarty, Michael
Hopkins, Kelvin


Corbett, Robin
Howarth, Alan (Newport E)


Corbyn, Jeremy
Howells, Dr Kim


Corston, Jean
Hoyle, Lindsay


Cousins, Jim
Hughes, Ms Beverley (Stretford)


Cox, Tom
Hughes, Kevin (Doncaster N)


Cranston, Ross
Humble, Mrs Joan


Crausby, David
Hurst, Alan


Cryer, Mrs Ann (Keighley)
Hutton, John


Cryer, John (Hornchurch)
Iddon, Dr Brian


Cummings, John
Illsley, Eric


Cunningham, Jim (Cov'try S)
Jackson, Helen (Hillsborough)


Curtis-Thomas, Mrs Claire
Jamieson, David


Darling, Rt Hon Alistair



Darvill, Keith
Jenkins, Brian


Davey, Valerie (Bristol W)
Johnson, Miss Melanie(Welwyn HatHeld)


Davies, Rt Hon Denzil (Llanelli)



Davies, Geraint (Croydon C)
Jones, Rt Hon Barry (Alyn)


Davis, Rt Hon Terry (B'ham Hodge H)
Jones, Helen (Warrington N)



Jones, Ms Jenny (Wolverh'ton SW)


Dawson, Hilton



Dean, Mrs Janet
Jones, Dr Lynne (Selly Oak)


Denham, John
Jones, Martyn (Clwyd S)


Dismore, Andrew
Jowell, Rt Hon Ms Tessa


Dobbin, Jim
Keeble, Ms Sally


Dobson, Rt Hon Frank
Keen, Alan (Feltham & Heston)


Doran, Frank
Keen, Ann (Brentford & Isleworth)


Dowd, Jim
Kemp, Fraser


Dunwoody, Mrs Gwyneth
Khabra, Piara S


Eagle, Angela (Wallasey)
Kidney, David


Eagle, Maria (L'pool Garston)
Kilfoyle, Peter


Edwards, Huw
King, Andy (Rugby & Kenilworth)


Efford, Clive
Kumar, Dr Ashok


Ellman, Mrs Louise
Ladyman, Dr Stephen


Ennis, Jeff
Lawrence, Mrs Jackie


Fisher, Mark
Laxton, Bob


Fitzpatrick, Jim
Lepper, David


Fitzsimons, Mrs Lorna
Leslie, Christopher


Flint, Caroline
Levitt, Tom


Flynn, Paul
Lewis, Ivan (Bury S)


Follett, Barbara
Lewis, Terry (Worsley)


Fyfe, Maria
Liddell, Rt Hon Mrs Helen


Gardiner, Barry
Linton, Martin


George, Bruce (Walsall S)
Lloyd, Tony (Manchester C)


Gibson, Dr Ian
Love, Andrew


Gilroy, Mrs Linda
McAllion, John


Godsiff, Roger
McAvoy, Thomas


Goggins, Paul
McCabe, Steve


Golding, Mrs Llin
McCartney, Rt Hon Ian (Makerfield)


Gordon, Mrs Eileen



Griffiths, Jane (Reading E)
McDonagh, Siobhain


Griffiths, Nigel (Edinburgh S)
Macdonald, Calum


Griffiths, Win (Bridgend)
McDonnell, John


Grocott, Bruce
McFall, John


Grogan, John
McGuire, Mrs Anne


Gunnell, John
McIsaac, Shona


Hall, Mike (Weaver Vale)
McKenna, Mrs Rosemary


Hall, Patrick (Bedford)
Mackinlay, Andrew


Hamilton, Fabian (Leeds NE)
McNamara, Kevin


Hanson, David



Harman, Rt Hon Ms Harriet
McNulty, Tony


Healey, John
MacShane, Denis


Henderson, Doug (Newcastle N)
Mactaggart, Fiona


Henderson, Ivan (Harwich)
McWalter, Tony


Hepburn, Stephen
McWilliam, John


Heppell, John
Mahon, Mrs Alice


Hesford, Stephen
Marsden, Gordon (Blackpool S)


Hewitt, Ms Patricia
Marshall, David (Shettleston)


Hill, Keith
Marshall, Jim (Leicester S)


Hinchliffe, David
Marshall-Andrews, Robert


Hodge, Ms Margaret
Martlew, Eric


Hoey, Kate
Meacher, Rt Hon Michael


Home Robertson, John
Meale, Alan


Hood, Jimmy
Merron, Gillian





Michael, Rt Hon Alun
Smith, Miss Geraldine (Morecambe & Lunesdale)


Michie, Bill (Shef'ld Heeley)



Miller, Andrew
Smith, Jacqui (Redditch)


Mitchell, Austin
Smith, John (Glamorgan)


Moffatt, Laura
Smith, Llew (Blaenau Gwent)


Morgan, Ms Julie (Cardiff N)
Snape, Peter


Morley, Elliot
Soley, Clive


Morris, Rt Hon Ms Estelle (B'ham Yardley)
Southworth, Ms Helen



Spellar, John


Mountford, Kali
Squire, Ms Rachel


Mullin, Chris
Starkey, Dr Phyllis


Murphy, Jim (Eastwood)
Steinberg, Gerry


Naysmith, Dr Doug
Stevenson, George


O'Brien, Bill (Normanton)
Stewart, David (Inverness E)


O'Brien, Mike (N Warks)
Stewart, Ian (Eccles)


O'Hara, Eddie
Stinchcombe, Paul


Olner, Bill
Stoate, Dr Howard


O'Neill, Martin
Strang, Rt Hon Dr Gavin


Organ, Mrs Diana
Stringer, Graham


Osborne, Ms Sandra
Stuart, Ms Gisela


Pearson, Ian
Taylor, Rt Hon Mrs Ann (Dewsbury)


Pendry, Tom



Pickthall, Colin
Taylor, Ms Dari (Stockton S)


Plaskitt, James
Taylor, David (NW Leics)


Pollard, Kerry
Thomas, Gareth R (Harrow W)


Pond, Chris
Timms, Stephen


Pope, Greg
Tipping, Paddy


Pound, Stephen
Todd, Mark


Powell, Sir Raymond
Trickett, Jon


Prentice, Gordon (Pendle)
Truswell, Paul


Prescott, Rt Hon John
Turner, Dennis (Wolverh'ton SE)


Primarolo, Dawn
Turner, Dr George (NW Norfolk)


Prosser, Gwyn
Turner, Neil (Wigan)


Purchase, Ken
Twigg, Derek (Halton)


Quin, Rt Hon Ms Joyce
Tynan, Bill


Quinn, Lawrie
Vis, Dr Rudi


Radice, Rt Hon Giles
Walley, Ms Joan


Rammell, Bill
Ward, Ms Claire


Rapson, Syd
Wareing, Robert N


Reid, Rt Hon Dr John (Hamilton N)
Watts, David


Rooker, Rt Hon Jeff
White, Brian


Rooney, Terry
Whitehead, Dr Alan


Ross, Ernie (Dundee W)
Wicks, Malcolm


Roy, Frank
Williams, Rt Hon Alan (Swansea W)


Ruane, Chris



Ruddock, Joan
Williams, Alan W (E Carmarthen)


Russell, Ms Christine (Chester)
Winnick, David


Ryan, Ms Joan
Winterton, Ms Rosie (Doncaster C)


Salter, Martin
Woodward, Shaun


Sarwar, Mohammad
Worthington, Tony


Savidge, Malcolm
Wray, James


Sedgemore, Brian
Wright, Anthony D (Gt Yarmouth)


Shipley, Ms Debra
Wright, Tony (Cannock)


Short, Rt Hon Clare
Wyatt, Derek


Simpson, Alan (Nottingham S)



Skinner, Dennis
Tellers for the Ayes:


Smith, Rt Hon Andrew (Oxford E)
Mr. Gerry Sutcliffe and


Smith, Angela (Basildon)
Mr. Don Touhig.




NOES


Ainsworth, Peter (E Surrey)
Brand, Dr Peter


Amess, David
Brazier, Julian


Ancram, Fit Hon Michael
Breed, Colin


Arbuthnot, Rt Hon James
Browning, Mrs Angela


Atkinson, Peter (Hexham)
Bruce, Ian (S Dorset)


Baker, Norman
Bruce, Malcolm (Gordon)


Baldry, Tony
Burnett, John


Ballard, Jackie
Burns, Simon


Beggs, Roy
Burstow, Paul


Beith, Rt Hon A J
Butterfill, John


Bell, Martin (Tatton)
Campbell, Rt Hon Menzies (NE Fife)


Bercow, John



Body, Sir Richard
Cash, William


Boswell, Tim
Chapman, Sir Sydney (Chipping Barnet)


Bottomley, Peter (Worthing W)



Bottomley, Rt Hon Mrs Virginia
Chidgey, David






Chope, Christopher
Hughes, Simon (Southwark N)


Clappison, James
Jack, Rt Hon Michael


Collins, Tim
Jackson, Robert (Wantage)


Cormack, Sir Patrick
Jenkin, Bernard


Cotter, Brian
Johnson Smith,


Cran, James
Rt Hon Sir Geoffrey


Davey, Edward (Kingston)
Keetch, Paul


Davies, Quentin (Grantham)
Key, Robert


Davis, Rt Hon David (Haltemprice)
Kirkbride, Miss Julie


Day, Stephen
Kirkwood, Archy


Donaldson, Jeffrey
Lait, Mrs Jacqui


Dorrell, Rt Hon Stephen
Lansley, Andrew


Evans, Nigel
Leigh, Edward


Ewing, Mrs Margaret
Letwin, Oliver


Fabricant, Michael
Lewis, Dr Julian (New Forest E)


Fallon, Michael
Lidington, David


Fearn, Ronnie
Lilley, Rt Hon Peter


Right, Howard
Livsey, Richard


Forth, Rt Hon Eric
Lloyd, Rt Hon Sir Peter (Fareham)


Foster, Don (Bath)
Loughton, Tim


Fowler, Rt Hon Sir Norman
Luff, Peter


Fox, Dr Liam
Lyell, Rt Hon Sir Nicholas


Garnier, Edward
MacGregor, Rt Hon John


George, Andrew (St Ives)
McIntosh, Miss Anne


Gibb, Nick
MacKay, Rt Hon Andrew


Gidley, Sandra
Maclean, Rt Hon David


Gill, Christopher
McLoughlin, Patrick


Gillan, Mrs Cheryl
Madel, Sir David


Gorman, Mrs Teresa
Malins, Humfrey


Gorrie, Donald
Maples, John


Greenway, John
Maude, Rt Hon Francis


Grieve, Dominic
Mawhinney, Rt Hon Sir Brian


Gummer, Rt Hon John
May, Mrs Theresa


Hamilton, Rt Hon Sir Archie
Michie, Mrs Ray (Argyll & Bute)


Hammond, Philip
Moore, Michael


Hancock, Mike
Morgan, Alasdair (Galloway)


Harvey, Nick
Moss, Malcolm


Hawkins, Nick
Norman, Archie


Heald, Oliver
Oaten, Mark


Heathcoat-Amory, Rt Hon David
O'Brien, Stephen (Eddisbury)


Hogg, Rt Hon Douglas
Öpik, Lembit


Horam, John
Ottaway, Richard


Howard, Rt Hon Michael
Paice, James


Howarth, Gerald (Aldershot)
Paterson, Owen





Portillo, Rt Hon Michael
Taylor, Ian (Esher & Walton)


Prior, David
Taylor, John M (Solihull)


Rendel, David
Taylor, Sir Teddy


Robathan, Andrew
Thomas, Simon (Ceredigion)


Robertson, Laurence
Tonge, Dr Jenny


Roe, Mrs Marion (Broxbourne)
Townend, John


Ross, William (E Lond'y)
Tredinnick, David


Rowe, Andrew (Faversham)
Trend, Michael


Ruffley, David
Tyler, Paul


Russell, Bob (Colchester)
Tyrie, Andrew


St Aubyn, Nick
Viggers, Peter


Salmond, Alex
Waterson, Nigel


Sanders, Adrian
Webb, Steve


Sayeed, Jonathan
Welsh, Andrew


Shephard, Rt Hon Mrs Gillian
Whitney, Sir Raymond


Shepherd, Richard
Whittingdale, John


Simpson, Keith (Mid-Norfolk)
Widdecombe, Rt Hon Miss Ann



Wilkinson, John


Smith, Sir Robert (W Ab'd'ns)
Willetts, David


Soames, Nicholas
Willis, Phil


Spelman, Mrs Caroline
Wilshire, David


Spicer, Sir Michael
Winterton, Mrs Ann (Congleton)


Spring, Richard
Winterton, Nicholas (Macclesfield)


Stanley, Rt Hon Sir John
Yeo, Tim


Streeter, Gary
Young, Rt Hon Sir George


Stunell, Andrew



Swayne, Desmond
Tellers for the Noes:


Syms, Robert
Mr. John Randall and


Tapsell, Sir Peter
Mr. Geoffrey Clifton-Brown.

Question accordingly agreed to.
Bill read the Third time, and passed.

BUSINESS OF THE HOUSE

Ordered,
That, at the sitting on Friday 28th July, the Speaker shall not adjourn the House until—
(a) any Messages from the Lords shall have been received; and
(b) she shall have notified the Royal Assent to Acts agreed upon by both Houses—[Mr. Mike Hall.]

Orders of the Day — Horseracing (Starting Prices)

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Mike Hall.]

Mr. Alex Salmond: I am delighted to move the Adjournment of the House on a debate that is of substantial interest to many people in the country. Indeed, if my memory serves me correctly, Mr. Deputy Speaker, it might have been of interest to your late father.
Before I move on to the substance of the debate, may I say that as I will shortly have more time on my hands, I am intensely grateful to hon. Members in all parts of the House for speculating on what I might be doing with that time? As a long shot, I might move in as a compromise candidate for Speaker of the House. Despite the overwhelming demand in all parts of the House, that might well be a long shot.
A favourite's chance would be the proposition put to me by the hon. Member for West Ham (Mr. Banks). who suggested that I might front up the Scottish bid for the Euro 2008 championships—an attractive prospect, particularly if the hon. Gentleman gives me the benefit of all his experience after the glittering success of the English world cup bid. That could be the favourite's chance—but we must move on to the substance of the debate on starting prices.
The intricacy of the matter is important. Since January last year, the racetrack odds and margins have swung in favour of the punters—a remarkable occurrence—as a result of the opening up of the pitch positions at the racetracks, which has made the betting market at racetracks rather more competitive. That in turn led to better starting prices, which are available to punters in betting shops around the country.
Not surprisingly, the big bookmakers were not at all happy with the resultant fall in their profit margins. At last year's Levy Board annual general meeting, Rob Hughes, the chairman of the Levy Board, announced publicly that the big bookmakers, including John Brown of William Hill and Chris Bell of Ladbrokes, had telephoned him, complaining about the fall in their profit margins. More generally, they complained of "economic ruin" and "financial suicide".
I am reminded of Adam Smith's comment that whenever two or three men of business are gathered together, what takes place is a conspiracy against the public interest. What has taken place as a result of the moaning and groaning of the big bookmakers is most certainly a conspiracy against the public interest.
It came to pass on 22 May this year that the starting price executive, which has responsibility for administering the returns system, issued new rules. There had been no demand whatever for any change, except from the big bookmakers. There was no consultation before the new rules were instituted. As many have pointed out, the old system was not broke so there was no need to fix it, but the new rules were none the less imposed unilaterally by the starting price executive.
Under the new system, two starting price returners operate at race meetings and are each required to draw up a list of at least five bookmakers—a total of 10 per meeting. The list must be determined before the start of

racing. The final starting price is determined from a majority of the bookmakers' quoted odds. Under the old, more flexible system, the returners had assessed prices through the racecourse betting ring, for the betting ring as a whole. It was a more flexible system that was related to the new competition in the ring. It depended, of course, on the integrity of the starting price returners. It was a well-tried system that had worked extremely well. Above all, it was perceived by all concerned to be fair and above board.
What has been the outcome of the changes? The evidence to date clearly indicates that starting price returns have moved in favour of the bookmakers to the detriment of the punters, improving the profit margins of the large bookmakers. Evidence collected by the Racing Post shows that the overround—that is, the theoretical profit margin of bookmakers—has improved substantially under the new system. For example, at the bank holiday meetings, when there were 10 race meetings on 9 May, the evidence showed improved margins for bookmakers compared with the corresponding fixtures for 1999.
Who made the decision on the starting price executive? Two of its members are from the Press Association, two from Trinity Mirror and two from Satellite Information Services. The chairman of the executive is Mr. Terry Ellis of S1S, who was once employed by Ladbrokes. The big bookmakers have a substantial interest in SIS. As The Observer pointed out, the perception of the betting shop punter must be that
the arrangement must seem as clean as coal.
What has been the reaction to the changes? As John McCririck of Channel 4 has pointed out—a weel kent face as we would say in Scotland—every body, every responsible person and every spokesperson in racing, apart from SIS and the big bookmakers, are opposed to the changes that have taken place
Keith Elliott, an independent member of the Levy Board appointed by the Home Secretary, describes the new system as
a scandal and a disgrace.
He added:
It is not appropriate for SIS to have such a prominent role in the determination of starting prices. We cannot let the fox look after the chickens. It will certainly damage customer confidence.
He said:
I would like us to go back to the previous system…That system worked well. It did what it was designed to do—return the prices that were available to punters on the racecourse.
Viscount Falkland said that
this development has caused monstrous damage to the perception of…racing…This is the most dangerous development in racing in recent times. It has to be changed. I hope that punters around the country will clamour for it to be changed.—[Official Report, House of Lords, 14 June 2000; Vol. 613, c. 1737.]
To show that the dividing lines on these matters are not purely between bookies and punters, I shall cite Andy Smith, an on-course bookmaker, who says:
It's being wholly done in the interests of Ladbrokes, Coral and Hill and absolutely against the interests of their betting-shop customers.
Rather disturbingly, when Channel 4's "The Morning Line"—an estimable programme—broadcast an interview with Keith Elliot expressing his views, the reaction of Terry Ellis and SIS was not to debate the issue but to put


lawyers on the job. They extracted an apology from "The Morning Line", but I would suggest that instead of adopting these bully-boy tactics, Mr. Ellis should be prepared to debate the issue.
Mr. Ellis has indicated that he will stand down as chairman of the starting price executive. I have a fellow feeling for people who take that decision. That being so, I shall not say as much about Mr. Ellis as perhaps I would have done before he made that particular decision. However, people in public life should be prepared to debate matters of public interest and should not censure debate by calling in lawyers.
The fact that Mr. Ellis was a senior executive for Ladbrokes is a substantial matter of concern when he becomes chairman of the starting price executive, which introduces unilaterally a system which is to the benefit of Ladbrokes, Hill and the other big bookmakers. These are matters of public concern and they should be debated without fear or favour, which is, I hope, what I am doing and what the Minister will do when he replies.
The Minister is well known as a friend of the betting shop punter. He is concerned about fairness and competition, and ensuring that people get a decent deal. I hope that his reply will indicate substantial concern on the part of the Government about what is going on.
I believe that what is required is a return to the old system—it worked. It was perceived to be fair and provided a reasonable deal for punters. We also need a reform of the starting price executive itself. It should have an independent chairman, two representatives from the Press Association, two from Trinity Mirror and two from the National Joint Pitch Council. Crucially, there should be no place for SIS, except perhaps as observers. The starting price executive needs to be perceived as clean and above board and definitely not as representing the interests of the bookmakers.
I suggest that those reforms should be instituted now. With great respect to the Minister, I do not think it is good enough to wait for Sir Alan Budd's committee on gambling which is not due to report until next summer. There are rumours, after all, that Hill and Coral are due to float on the stock market and that Labrokes' betting operation could be floated off, too. It is reasonable to believe that one of the reasons for the changes is to see profit margins increase so that there can be big pay-offs when the companies are floated. If that is so, it should not be at the expense of the betting shop punter.
I shall summarise my argument. The new starting price system introduced on 22 May this year has undoubtedly proved to be to the bookie's benefit and to the detriment of punters in the shop. The new system has improved profit margins for the big bookmakers and led to worsening starting price odds for the betting shop punters. The starting price executive has let punters down by introducing the new system; and the fact that Terry Ellis, the chairman of the starting price executive, is a former Labrokes employees and that his company, SIS, is substantially owned by the big bookmakers gives reasonable grounds for concern. As Keith Elliott, the independent member of the Levy Board, said:
We cannot let the fox look after the chickens.

If we are serious about protecting the interests of punters and defending the integrity of racing, the new starting price system must be scrapped. The big bookmakers already get a fair deal from racing; they should not be allowed to rip off the punters.

The Parliamentary Under-Secretary of State for the Home Department (Mr. Mike O'Brien): I begin by congratulating the hon. Member for Banff and Buchan (Mr. Salmond) on raising an important issue. Horse racing and betting on horse racing have a long and honourable history in Great Britain. He is one of many hon. Members who have taken an active interest in racing—attending race courses and, no doubt, betting either on or off course. I also congratulate him on his decision to retire. I hope that he has a long and honourable retirement and spends a lot more time at the races rather than in this place causing problems to Ministers.
I am glad that the hon. Gentleman has brought this issue to the attention of the House, because there is much concern about it. The turnover on horse race betting is an important matter for the Government and for the economy as a whole. It helps to support 8,000 licensed betting shops in Britain, and a growing internet and telephone betting industry in which many people are employed. The total amount staked on horse races with off-course bookmakers in 1999–2000, including bets with the Tote, was about £5 billion. That is an indicator of the widespread popularity of horse racing, its importance and its value to the Exchequer as a source of revenue.
As hon. Members know—some to their cost—the tax on off-course betting stands at 6.75 per cent. Government revenues from off-course horse race betting therefore approach £350 million a year. What happens in the industry is important to the Government.
I make no secret of my concern at what the hon. Gentleman has said tonight. There has been a debate in the racing industry and in the media for some time on an issue that I have monitored closely, including by watching the estimable John McCririck, the racing commentator, in full flow on television on a number of occasions expressing his concern about the dangers to the integrity of the industry and the need to protect the punter.
The way in which on and off-course betting is organised developed over the years and has largely stood the test of time. It has a reputation for integrity. It is plainly important that the majority of punters, who place bets in the betting shop rather than on the race course, know that they are getting a fair deal. It is also important that off-course bookmakers can run a commercially viable operation. There is therefore a balance to be struck.
The organisation of off-course betting is not always understood by those who know little of the industry. Leaving aside betting on the Tote, which is a separate system, it is up to the punter at the betting shop to decide whether to back a horse at starting price or at whatever odds the bookmaker offers. As a race approaches, betting shops will offer fixed odds, based on early shows of the betting on the course. For some races, they might offer fixed prices throughout the day. In some cases, especially for major races, such as the National or the Derby, the bookmaker will offer ante-post prices on the horses for days, weeks or even months in advance. The odds that the betting shop offers on a horse will move up or down according to the state of the market.
Betting shop customers have a choice and can place their bets at fixed odds. However, many choose not to do that; instead, they place their bets at the starting price—the odds given by the bookmakers at the race course when the race is about to start. When punters place their bets, they do not know exactly what the starting price will be and therefore how much the bookmaker will pay them if they win.
The key question, to which the hon. Member for Banff and Buchan has rightly drawn attention, is the maintenance of public confidence in the way in which the starting prices are worked out. It is important that punters who bet on the starting price get a price that fairly reflects the prices that are available on the course just before the off, and that the way in which the price is calculated is transparent.
Arrangements for working out starting prices depend on starting price returners at the race course. They note the varying prices that bookmakers offer in the betting ring just before the start of the race. They must decide on representative prices for each horse and notify betting shops around the country of them. The task is organised by the starting price executive, which brings together the three major media companies—the Press Association, Trinity Mirror and Satellite Information Services—which employ the returners.
The arrangements have never been directly a matter for the Government. Nevertheless, as the hon. Member for Banff and Buchan said, some recent changes have been made; I understand that the executive made them in May. The aim was to offer a more transparent, accurate and efficient method of assessing starting prices. The returners had previously tried to take account of the prices offered by a wide range of bookmakers in the ring. That is difficult to do properly and fairly, especially in the limited time available in the run-up to a race.
The starting price returners now concentrate on a smaller sample of bookmakers. Allegations have been made that that reduces the starting price, of which the starting price executive notifies betting shops around the country. If that were so, it would shade odds at which off-course bookmakers paid their starting price customers. The bookmakers would be richer and the punters would be poorer. Tonight and on other occasions, I have heard arguments to support that proposition.
It is said that other changes that the National Joint Pitch Council made to controls on the betting ring a year or two ago led to a more customer-friendly betting market on the course. It is suggested that the restructuring of the on-course betting market led to an overall increase in the starting prices of which betting shops are notified, and that there was therefore an incentive for off-course bookmakers to do something about circumstances in which their profits were being cut.
Off-course bookmaking interests have always hedged their bets with an on-course bookmaker to manage their liabilities. Consequently, the weight of their money may affect the starting price. However, it has now been suggested that, because the new starting price system takes account of fewer on-course bookmakers, who are thus easier to identify, the larger off-course bookmakers may be able to hedge their bets more strategically with a view to manipulating the starting price in a way that is favourable to their business.
I have listened carefully to the comments of the hon. Member for Banff and Buchan and other observers on the matter. I understand their anxieties and I am watching developments with great care and not a little concern. If the punter is being ripped off by the bookmaker, the Government may need to express their views strongly to the industry. I am well aware that early signs show an apparent decrease in the starting prices at some races compared with those returned for the same races in previous years. The position will vary from course to course and race to race. However, I am advised that it is too early to say that the evidence has conclusively proved that there is a problem in which we need to intervene. We are monitoring developments with a great deal of concern and care.
Our job as a Government is to ensure that punters are not ripped off. However, we will not intervene in the market unless the evidence is clear. I am watching matters with interest and concern, but the true effect is unlikely to be apparent yet.

Mr. Alan Meale: I congratulate the hon. Member for Banff and Buchan (Mr. Salmond) on raising an important matter. I draw the attention of my hon. Friend the Minister to the evidence given to the Select Committee on Home Affairs—of which the hon. Member for Banff and Buchan was a key member—by Mr. Peter George, the then chief executive on betting of Ladbrokes, who admitted openly that the company was proactive rather than reactive in terms of hedging bets on race courses. The major bookmakers already have considerable influence on the course in lowering the price for off-course betting, which the large bookmakers control. In terms of the geographical remit to which my hon. Friend refers, the problem will not show up, as the large bookmakers have that remit right across Britain. I take this matter very seriously and it is an important example of how, yet again, the big bookmakers are trying to take advantage of the ordinary punter by hedging bets even further before there is a return in the betting shop.

Mr. O'Brien: My hon. Friend puts his point strongly and it is right that Members should express the concerns of constituents. As it stands, the Government have no legal base on which they can intervene in this market. If we wanted to intervene, we would have to take powers and pass legislation. However, I am sure that the industry and the bookmakers will listen with great care to what is said in the House.

Mr. John Greenway: May I also congratulate the hon. Member for Banff and Buchan (Mr. Salmond) on raising this matter, which is an issue of concern? I have a great deal of sympathy with what the Minister has said. I do not see a basis on which he can intervene. However, if the matter persists—quite apart from the prospect of considering whether, as an outcome of the gambling review, this may be a matter for legislation—would he consider referring the matter to the Secretary of State for Trade and Industry and the competition authorities? If the consumer—the punter—is being disadvantaged by this kind of practice, the House ought to unite behind a call to do something about it.

Mr. O'Brien: I hope that the bookmaking industry is listening with care to the debate. It is important that we


look at the issue of confidence in the industry. It is not just a matter of doing things the way that they ought to be done, or doing things honestly. There is also a question of perception; things must be perceived to be open and above board. There should not be public concern. It is important that the punter believes that, when he places a bet, he is getting a fair deal. There is concern about the way in which things are done. The hon. Gentleman is right to say that the odds at which punters are prepared to back horses and the odds that bookmakers are prepared to offer them are not things that the Government regulate.

Mr. Salmond: I welcome the Minister's concern, and his words should be listened to carefully by those concerned. I welcome also the fact that Members on both sides of the House share that concern. However, let us say that we were not talking about betting shops and race meetings but about the financial markets. If we had a situation in which a company—in this cases SIS, which is owned by the big bookmakers—were in a position to regulate the profits available in the market, that would not be allowed legally in the financial markets. If it would not be allowed in the financial markets, why should it be allowed in this market, which affects a substantial number of people in the UK?

Mr. O'Brien: The hon. Gentleman knows well that the law has a different approach to gentlemen's agreements or gambling than it does to contracts involving financial matters, such as deals and agreements in the City. To that extent, there has historically been a different legal basis for the approach to these issues. The hon. Gentleman needs to be careful; he appears to be suggesting going much further than I think that he really wants. I think that he is identifying a particular concern that a number of punters feel about a particular issue. In his intervention, he almost seemed to be saying "Let us go much further, and regulate, on a legal basis, all contracts under which these bets are placed." I do not think that he wants to do that.
I think that, to some extent, this is a commercial matter between bookmaker and customer. If the punter does not accept the terms of one bookmaker, he can always go to another, at least in theory. Of course, he could also use the Tote—and, for obvious reasons, the Government want to encourage use of the Tote.
I accept that the betting industry is important, and we want it to succeed. I understand the hon. Gentleman's concern about something that is important to the success and integrity of the industry as a whole. After all, the industry trades on its integrity, and, as I have said, the industry is important to Britain. If it compromises its integrity, it damages our economy and the Inland Revenue's income. We are therefore watching what is happening very carefully.
Integrity must be both real and perceived to be real. When people do not believe that integrity is present, even if in reality it is, they will be reluctant to rely on it. The bookmakers need to remember that.
I was glad to learn recently that the starting price executive had responded to concern expressed in the racing press and elsewhere. It has said that it will commission independent consultants—a major accounting

firm—to undertake a review of the new SP system, to see how it is working in practice and to compare its operation with the previous arrangements. It has also said that it will use two SP returners at all race meetings except minor ones that do not feature in the betting shops' service. Each returner will monitor a minimum of five bookmakers, and the two will compare the prices that they have recorded and determine the SP.
I welcome the executive's announcement. I trust that it will take account of what has been said here tonight, and that, when it reaches its conclusions with the help of the accountants, it will consider not just the views of those independent consultants, but the views of hon. Members. If there is a problem, it is important for it to be identified, and it is important for the bookmakers to be prepared to address it.
There is a possible issue of consumer protection. The Government have set up a review of gambling legislation as a whole. The review body is chaired by Sir Alan Budd, and is due to report next summer. It has extensive terms of reference, which include a requirement to make recommendations on the kind and extent of regulation that is appropriate to gambling activities in Great Britain. That wide remit will enable Sir Alan and his team to consider whether there might be controls in this area, and, if so, what they should be.
No doubt Sir Alan would want to consider evidence on this matter if it were put to him. That would be part of the whole process of ensuring that the gambling industry has not only integrity in reality, but a reputation for integrity. We are acting, at some degree of risk, because there is public concern—because people feel that they may be ripped off by bookmakers. If that is the case, we want to ensure that the bookmakers address the issue. They may want to do that by convincing people that what they are doing is proper, fair and appropriate: that is the approach that they are taking. However, they may well have to conclude that, whether what they are doing is fair or not—it may well be fair—they must bear in mind the perception that people may have, and therefore consider whether to adopt a particular course.

Mr. Meale: Given the resignation of Mr. Ellis, might it not benefit this side of the industry if the new chair had independent status? That might make it easier for people to deal with the discrepancy involved.

Mr. O'Brien: My hon. Friend makes an interesting point. Although the issues will have to be examined, I shall certainly bear in mind what he said and consider whether it is appropriate to take that action.
The hon. Member for Banff and Buchan is to be congratulated on initiating this debate. As he will know, Adjournment debates usually involve a Minister and only one other hon. Member. For this debate, however, at a late hour, quite a few hon. Members have stayed because they are seriously concerned about the issue. It is right that we should have this debate, and it is right that others should listen to it.
The Government are concerned that future gambling legislation should properly balance the interests of business with the need to protect consumers and the


public. I assure the hon. Member for Banff and Buchan that the Government are perfectly prepared to act in the interests of betting customers and of the industry as a whole if there is a need to do so. The Government are watching the situation with care, as are other hon. Members. When the House returns in the autumn, if we

need to have another debate on the issue because there is still serious concern about it, I am sure that the bookmakers will realise the seriousness of the situation

Question put and agreed to.

Adjourned accordingly at twenty-nine minutes to Twelve midnight